Did an MC save our lives or was it murder on the dance floor?

A DJ playing in front of a crowd
Bryn Jones

If Mark Carney was a DJ, then last week he double-dropped a huge bass-line and the crowd on the dance floor – who thought the party was coming to an end – just went crazy.

The bouncers will spend the rest of this week peeling them off the ceiling. So the Bank of England actually surprised markets and delivered on all fronts. I had expected the moves, but not the quantum: a 25-basis-point cut (tick); some QE (tick, although £60bn of gilt purchases is more than I would have expected); a new term funding structure to replace the old Funding for Lending Scheme (tick); and £10bn of corporate bond purchases ... I discussed, but didn’t think they would do it (big fat cross). 

Communication from the bank has indicated more cuts to come before year-end, possibly around the time of the November inflation report or earlier, if data warrant it. The bank has ruled out sub-zero rates. Mrs Jones is happy as our mortgage rate drops to just 1.1% (so more expenditure freed up for curtains!). With the bank expecting growth to tank to sub-1%, its inflation-fighting credentials just went out the window, as this cut is to support growth ... that is a hell a lot of curtains by anyone’s standard …. 

The result was a huge rally in the gilt market and one heck of a move in sterling corporate bond yields. My screens were awash with bids. Lloyds immediately put out a monster buylist, as did other brokers, all scrambling to get long sterling risk. In some cases I saw entire balance sheets being flooded into the market to buy paper! Even insurance and bank debt saw demand as the crazed frenzy spilled over into higher beta subordinated debt as well. The banks should benefit from the term funding scheme as they can borrow up to 5% of the value of their existing loans in order to lend on to retail and corporate borrowers. The new scheme totals £100bn. So a rally in bank paper too.

US treasury and bund yields took their lead from gilts, but on a normal day I'd have seen their yields rising. What’s normal anymore? The German construction PMI rose from 50.4 to 51.6, the retail PMI was up from 51.6 to 52.0, suggesting little spillover from Brexit. It was not much different in the US: weekly jobless claims still low at just 269,000, rising Bloomberg confidence data, and US factory orders ex-transport rising 0.4% versus expected falls of 0.2%.

You have to ask yourself: did Carney and the other Keystone cops really need to cut rates, let alone chuck the kitchen sink at it? 
A case of too much too soon, methinks.    

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Rate this page:
No votes yet

We’d love to hear your feedback

Please help us improve and shape our future services and products by taking a short survey.