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29th October Market Commentary

By Henry on 2019-10-29

Plenty to talk about since our last piece, although for the UK readership sadly still no sign of a solution one way or the other to the referendum held a staggering three years and four months ago - hot off the press is that Labour is now backing an early election which may finally at least start us on a (long and winding) path towards closure...

In October alone there have been a plethora of actions taken by central banks to stimulate their domestic economies in the form of rate cuts (often, alongside further measures). Six meaningful economies have eased (Australia, Chile, South Korea, Inda, Russia and Turkey) with a further cut expected in the US tomorrow potentially giving the market their treat one day early (90% probability). A trick at this point would probably not go down so well, although year to date as an equity investor in the NASDAQ you would have returned over 25%. Worth noting though is how quickly gains eroded last year in the final months and weeks of 2018, as well as the rapid rate of outflows from this part of the market recently which one would expect to take steam out of this upward march (see below for more from Goldman Sachs via Bloomberg). The list of those hiking is pretty short, with a grand total of...zero. The race to the bottom is well and truly underway. Where there was liftoff yesterday is Wall Street, where history was made. Virgin Galactic listed on the NYSE, now offering everybody the ability for the first time to invest in space tourism.

UK Treasury Bills continue to behave themselves, with auctions clearing in orderly fashion and FTF rates holding steady in the mid to high 60s across 1, 3 and 6 month terms, with what could even be described as a positive sloping yield curve (across this period at least). Should a month simply be too long a hold period, the good news is that as of next week clients will be able to achieve similar or higher yields for a term as short as a week by lending to a highly-rated financial institution secured against government bonds, through our inaugural Bank Secured FTFs.

We have discussed in some detail the dislocation in US government financing markets which is now being more formally addressed by the FED. For a factual summary please see here, with further reading around the dislocation itself here. Whilst in theory this policy looks great for steadying rates, the fact that the Federal Reserve is providing stimulus only to the primary dealers (who are already at/close to full capacity) and to MMFs (who hold no bank reserves) both limits the effectiveness of the policy as a tool for monetary stimulus and potentially creates the opportunity for significant value for those participating in these markets, and before the year is out.

With treasury bills rising in price (reducing return), and bank deposit rates moving ever-closer to zero, at least now the hunt for yield AND risk reduction is over! With our USD denominated Bank Secured FTFs you will again be able to place cash on deposit whilst taking government assets as security and get paid more (think mid to high 1.80's net, before the upcoming drama unfolds, adding tens of basis points on top). We shall keep you all updated as to how all of this unravels over the coming weeks and months.

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JPMorgan warns U.S. money-market stress will get much worse

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