The current state of the markets is best described as a smorgasbord of confusion. The Eurozone recently moved towards quantitative easing with €1.1 trillion in asset repurchases, an additional €60 billion per month extended for six months, and a 10-basis point decline in the deposit rate to -0.30%. By contrast, the Fed moved in the opposite direction with a 0.25% hike in interest rates to bring the US interest rate to 0.50%. From a purely theoretical point of view, the Euro should have weakened with the double negative factors acting against it, but it strengthened. The current exchange rate of approximately 1.09 to the dollar will not lost however and the dollar will appreciate through 2016 by approximately 5% against the euro.
As a business owner in the UK, this information can be used to your advantage when purchasing euro denominated products and services, dollar-denominated products and services or with investments in those respective countries. Further, we can expect interest rates in the US to increase to over 1% by the end of 2016, meaning that dollar demand will increase accordingly. The Bank of England did not act recently with its Monetary Policy Committee. For the meantime, interest rates will remain at 0.5% owing to global uncertainty. The UK economic recovery has been described as brittle, and any increase in interest rates could derail the performance of emerging market countries, the Eurozone and the UK economy.
UK multinationals operating abroad stung by China weakness
Recall that China weakness is a born in the side of businesses, investors and major averages the world over. That the Chinese economy has decided to do a 180° pivot from an exporter-driven model to one which focuses internally on services and manufacturing is paramount. China is consuming far less from multinational corporations operating in emerging market economies. Many of these companies are either based in the United Kingdom such as BHP Billiton, Rio Tinto and Anglo American, and they are dragging indices like the FTSE 100 deeper into the red. As an investor in the UK, mining and energy stocks are persona non grata right now. However we will soon be approaching a point where value stocks will come into play. We’re not quite there yet as markets have not bottomed out, especially energy markets such as oil, natural gas and other refined products. Declining oil prices are typically perceived as a boon to consumers and companies as it lowers the costs of operation which in turn allows for lower prices and/or better profit margins. However one should be aware of the disinflationary effects of low oil prices for companies. The fact that global demand is so weak that it cannot clear inventories from the markets and that gasoline inventory surpluses now exist in the US is deeply troubling.
Business owners in the UK must not panic
We have to guard against panic selling in the UK, as speculative sentiment can sink markets and drag us right back into a recession the likes of which we saw in 2008/9. Back at home, there is also growing uncertainty about the upcoming referendum about whether the UK will remain part of the European Union. The 2% inflation target for 2016 is unlikely to be reached given the sheer volatility we are seeing in equities markets, and OPEC’s decision to maintain production regardless of price declines. Of course, traditional investment in stock markets do not gain much traction in bearish markets. However traders investing in futures markets, binary options markets, spread betting CFD’s or even forex traders can gain tremendous advantage from markets showing such clear bearish trends. The tax advantages of spread betting for example are enormous, especially in the UK where spread betting is fully regulated by the FCA.
Business owners can also take advantage of the current exchange rates between the GBP and the South African Rand, the Chinese renminbi, the Russian ruble, the Turkish lira, the Brazilian real, the Venezuelan Bolívar and other currencies. In other words imports from emerging market countries are dirt cheap and now is the time to buy raw materials, finished products and other services from low-cost producers. While equities markets are hardly a viable investment right now, gold is once again gaining favour and proves to be a good store of value for businesses wanting to invest for growth in bearish times. The interest-rate in the UK is likely to increase to 0.75% in the near future, and this will mean that the cost of borrowing will increase accordingly. If you are business owner with excess capital available you’re thinking of expansion now is the time to do it before the costs of borrowed capital (long-term loans, credit facilities, etc.) become more costly. The next inflation report for the UK will be available on 4 February and that will prove to be critical for gauging the sentiment of the monetary authorities in the UK.
By Brett Chatz, contributor for InterTrader