ALEX BRUMMER: Rising global interest rates could wreak havoc on over-exuberant financial markets
The tide on global interest rates appears to be reversing.
It’s not just the Bank of England feeling the heat as consumer prices peak 4.2% in 11 years, but the Federal Reserve and the European Central Bank.
The combination of fiscal laxity induced by the pandemic, monetary accommodations and market bubbles is radically reshaping the economic landscape. In the UK, it is hard to see the Bank of England resisting the pressure for an interest rate hike as early as December.
Rate hike: It’s not just the Bank of England feeling the heat as consumer prices peak 4.2% in eleven years, but the Federal Reserve and European Central Bank too
What is more surprising is the change in mood in the United States. So far, the view of the Fed and Wall Street is that the normalization of interest rates from very low levels will wait until the central bank finishes its bond buying program next year.
What has changed is the galloping recovery of the most resilient economy in the G7 and the disproportionate inflation it entails.
The United States is headed for the fastest growth in a generation, retailer sales are booming, the wages of the lowest-paid workers are skyrocketing, the hiring of new employees is increasing, and bank balances are soaring. households soar.
There is impatience over the Fed’s reluctance to remove the punch bowl. Morgan Stanley boss James Gorman, who sits on the New York Fed’s board of directors, thinks it’s time to end the delays and move straight to the hike in the key federal funds rate, which guide all other US borrowing costs, starting from the current level near zero.
The theory among New York bankers is that the only reason Republican Fed Chairman Jay Powell is refraining from raising rates is because he wants to convince President Joe Biden that he is okay with it and that he will be reappointed for a second term when the decision is taken. in the next few days.
The irony is that the growth takeoff hurts rather than helps the president because the public doesn’t like racing prices.
The current dissonance with the Fed could make it easier for the president to nominate Democratic economist Lael Brainard, the only other candidate questioned.
There is also a backlash against Christine Lagarde’s money printing and the ultra-low interest rate regime at the European Central Bank (ECB).
Isabel Schnabel, German member of the ECB’s board of directors, warns that with inflation of 4.1% in the euro zone, the bank must be ready to control the cost of living.
Transitory inflation has been kicked out of the lexicon of central banks. Taming the price tiger is again seen as necessary.
The impact of this on over-exuberant financial markets could be the next serious story.
The residents repulsed
For too long, corporate boards have been swayed by activists who are often armed only with stocks leased to large battalion institutions and complex derivatives.
Many boards are too complacent and change agents are needed.
It would be much better if the activism came from the real owners of the businesses rather than the get-rich-quick financiers.
The power company SSE may not be that popular in these times of soaring energy costs, but it has given Paul Singer’s serial nuisance a red card.
Following COP26, the decision to invest £ 12.5 billion in renewable capacity by 2026 is to be applauded.
He sets an example for other major power companies. What is disappointing is that the vision gets little rewards and the short-termism has caused the SSE share price to drop 4.3% in the last few trades.
SSE is not the only FTSE 100 company to keep activists at bay.
Managing Director Emma Walmsley is doing an admirable job in her own way at Glaxosmithkline with new treatments, including a breakthrough in HIV, emerging from the pipeline quickly and furiously. The valuations currently placed on its consumer healthcare business, when split, are much higher than originally expected.
Jes Staley’s stewardship at Barclays ended in a vulgar manner and a row over his salary. But his relentless pursuit of the investment bank dollar ended New York activist Ed Bramson’s challenge.
Maybe a trend.
If there was any doubt as to where the real power now lies in global commerce, the issue was clarified by Amazon’s decision to sack US card giant Visa – causing its shares to go off the rails.
The biggest threat to traditional finance are the giants of Silicon Valley.
They start to flex their muscles.