20 ★ Thursday12 September 2019

David Kelly

Markets Insight

United Rentals as a gainer afterw
Citigroup added the tool hire specialist to
its focus list of recommended stocks.
While sentiment towards cyclical
sectors has been improving in recent
weeks, the premium awarded to stocks
with low-volatility earnings remains at a
multi-decade high, which may prove
unsustainable, Citi said.
The broker also argued that United
Rentals was less of a cyclical than in the
last economic downturn, thanks in part to
a stronger balance sheet.
Baker Hughes lipped afters General
Electric et out plans to cut its majoritys
stake in the oilfield services group.
Gamestop as under pressure after itsw
results missed expectations for the
second straight quarter due to falling
sales of both new and used kit.
The video games retailer also set out a
strategy to improve profitability with
store closures and digital investments
aimed at smoothing out the sales troughs
between console releases.
Dave & Buster’s, the restaurant and
games arcade operator, dived after
warning that competition would hit full-
year revenue.
Same-store sales declines were piling
the pressure on D&B, which has been
targeted by activist investors.Bryce Elder

Wall Street Eurozone London

Kone, the Finland-based elevator maker,

was among the day’s sharpest fallers

after Morgan Stanley advised selling.

Investors have ignored soft results this

year from Kone to focus instead on

Chinese orders and the prospect of a tie-

up withThyssenKrupp’s competing

division, Morgan Stanley said.

But recent tightening measures in

China increased the chance of order

growth slowing into next year while the

potential of any Thyssen deal was

difficult to value given complications

around shareholder structure, antitrust

and corporate governance, said the

broker. If everythingwent perfectly, a

combined Kone-Thyssen would only be

worth 15 per cent more than Tuesday’s

closing price, it said.

Inditex etreated after second-quarterr

results from theZara wner showedo

margins under pressure.

The clothing retailer’s 8.2 per cent

quarterly sales growth matched market

forecasts but its gross margins suffered

as US dollar strength inflated Asian

buying costs.

Vestas Wind Systems ose on the backr

of a UBS upgrade to “buy”.

UBS viewed Vestas as the best

managed of the global wind turbine

makers.Bryce Elder

Royal Dutch Shell issed out on a FTSEm

rally after HSBC advised a switch intoBP.

Macro uncertaintiesgave oil companies

a tougher 2020 but BP’s lower free cash

break-even than Shell should make it the

more defensive investment, HSBC said.

While Shellwould be winding down its

$25bn share buyback by next year, BP

had kept its powder dryfollowing its

Deepwater Horizon disaster andhad the

potential to begin a buyback programme

in the second half, the broker said.

A weaker pound and a continued

global rotation away from momentum

stocks helped lift the wider market,

thanks largely to bond proxies such as

British Land.

London Stock Exchange ed the FTSEl

100 gainers on hopes thatHong Kong

Exchanges nd Clearinga ’s takeover

approach would put the bourse in play.

While LSE was widely expected to

reject HKEX’s £32bn cash-and-stock offer,

the interest gave a fillip to speculation

thatIntercontinental Exchange r CMEo

might be drawn into bidding before the

UK groupmoved out of their reach.

Antofagasta lipped after Exane BNPs

Paribas said the copper miner needed to

increase capital expenditure in 2020 and

downgradedit to “neutral”. It advised

switching intoKaz Minerals.Bryce Elder

3 Euro dips below $1.10 as ECB meeting
takes centre stage
3 Oil whipsaws lower after reports
Trump discussed easing Iran sanctions
3 Risk-on mood helps Wall Street stay in
positive territory

Today’s European Central Bank meeting
loomed large over markets with currency
traders pricing in policy easing moves
that weakened the euro.
In what will be Mario Draghi’s
swansong meeting as ECB president, the
central bank was expected to cut interest
rates and lay out further stimulus —
policies that tend to drag on the single
currency.
The euro fell 0.4 per cent yesterday
against the dollar to $1.099.
“The mere thought of easing is
probably keeping the euro on the
defensive at the moment,” Shaun
Osborne, chief currency strategist at
Scotiabank, told Reuters.
The promise of an accommodative
push by policymakers lifted market
sentiment. The Stoxx Europe 600 index
rose 0.9 per cent, aided by a 0.4 rise in
Paris for the CAC 40.
“Germany may be in technical
recession but Europe has been improving
recently thanks to momentum in France
and Spain,” said Luca Paolini, chief
strategist at Pictet Asset Management. “A
fresh round of stimulus from the ECB
should also help.”

A central bank also grabbed the

limelight Stateside. Ahead of the Federal

Reserve’s meeting next week, Donald

Trump said in a tweet that the bank

should “should get our interest rates

down to ZERO, or less, and we should

then start to refinance our debt”.

Following the US president’s dovish

broadside, yields on US Treasuries briefly

fell before bouncing back with those on

the 10-year benchmark rising 4 basis

points to 1.74 per cent.

On Wall Street, the Nasdaq Composite

and S&P 500 indices advanced 0.8 per

cent and 0.5 per cent, respectively, while

the Dow Jones Industrial Average was up

0.3 per cent by midday in New York.

Mr Trump’s presence was also felt in oil

markets. Brent crude prices fell sharply,

reversing early gains to slide into

negative territory for the session after a

report that the president had discussed

easing sanctions against Iran.

Brent, the international benchmark, fell

2.7 per cent to $60.73 a barrel, having

earlier traded as high as $63.27 a barrel.

WTI, the US marker, lost 2.6 per cent to

$55.82 a barrel.Ray Douglas

What you need to know

Euro slips to one-week low ahead of ECB meeting

 per 

Source: Bloomberg















 Sep  

The day in the markets

Markets update

US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2991.42 1531.70 21597.76 7338.03 3008.81 103262.
% change on day 0.40 0.76 0.96 0.96 -0.41 0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 98.600 1.100 107.745 1.235 7.118 4.
% change on day 0.279 -0.362 0.429 0.000 0.180 -1.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.728 -0.564 -0.211 0.561 3.053 7.
Basis point change on day 4.920 -1.200 1.840 -0.200 1.000 -2.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 345.46 60.73 55.80 1498.25 17.99 2845.
% change on day 0.56 -3.33 -3.63 -0.73 -0.99 0.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

| |||||| |||||||| |||||

Jul 2019 Sep

2800

2880

2960

3040

| |||||||||||||||||||

Jul 2019 Sep

1400

1440

1480

1520

1560

| |||| |||||||| |||||||

Jul 2019 Sep

7040

7360

7680

8000

Biggest movers
% US Eurozone UK

Ups

Waters 4.

Centurylink 4.

Tripadvisor 3.

Packaging 3.

Intuitive Surgical 3.

Klepierre 5.

Edf 4.

Hugo Boss 3.

Kering 3.

Stmicroelectronics 3.

London Stock Exchange 5.
Evraz 4.
Persimmon 4.
British Land 4.
Fresnillo 3.
%

Downs

Baker Hughes A Ge -3.

Interpublic Of Companies (the) -3.

Davita -2.

Xerox Holdings -2.

Take-two Interactive Software -2.

Prices taken at 17:00 GMT

Inditex -3.

Kone -1.

Henkel -1.

Seadrill -1.

Galp Energia -1.

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Antofagasta -2.

Informa -0.

Royal Dutch Shell -0.

Royal Dutch Shell -0.

Intertek -0.

All data provided by Morningstar unless otherwise noted.

D

octors know that any medi-

cine can be a poison if

administered to the wrong

patient, at the wrong time,

or in the wrong dose.

Similarly, economists recognise that

there are serious side-effects from mon-

etary stimulus. But few properly assess

the main effects, both positive or nega-

tive. That is a mistake.

With the evolution of economies over

time, there are some countries for

whom cutting interest rates from

already very low levels is likely to sup-

press rather than stimulate demand.

This is now the case for major devel-

oped nations. The latest round of mone-

tary easing, likely to continue with the

European Central Bank oday and thet

USFederal Reserve ext week, mayn

make the global economy weaker rather

than stronger.

During the global financial crisis, cen-

tral banks, led by the Fed, acted as lend-

ers of last resort and steadied a fragile

financial system. In this critical role

they were imaginative, aggressive and

very effective.

In the decade since, they have imple-

mented unprecedented monetary stim-

ulus, both conventional and unconven-

tional, in an effort to boost aggregate

demand.

However, these latter efforts have

been largely ineffective and may even

have been counterproductive.

This is not a commentary on the cen-

tral banks’ intentions, which were good,

but rather on the impact of the evolu-

tion of the global economy and the low

existing level of interest rates. These

forces, combined, have diminished the

positive effects of monetary stimulus

and have enhanced its negative effects.

Consider the six broad ways in which

lower interest rates affect demand.

There is a price effect: lower rates make

it cheaper to borrow, thus encouraging

investment and discouraging saving.

There is also a wealth effect, through

which lower rates boost asset prices and

thus promote consumption by making

people better off. There is a currency

effect too, as lower rates cause a cur-

rency to fall, boosting exports.

On the negative side, though,lower

rates educe income for savers, poten-r

tially more than they cut expenses for

borrowers. There are also psychological

impacts. These include a confidence

effect, where consumers and businesses

worry when they see a central bank

being forced to cut rates to support the

economy. There is an expectations

effect too, whereby borrowers assume

that rate cuts today mean further rate

cuts down the road, and thus wait for

lower rates before borrowing.

Because of these offsetting effects, the

overall impact of monetary stimulus

has always been mixed. To the extent

that the three negative effects are more

powerful than the three positive ones,

then the medicine has turned to poison.

In the US, for example, the shrinking

importance of the manufacturing sector

— which has fallen from over 30 per cent

of employment in the 1950s to less than

9 per cent today — has reduced the ben-

efit of lower rates in spurring capital

spending.

In addition, a very low starting level of

interest rates makes other factors such

as downpayments and credit scores

more important in qualifying for a

mortgage, which means that lower rates

are less effective in stimulating the

housing market. The wealth effect has

also become less potent over time,

because of an increasing concentration

of assets among upper-income house-

holds who are less likely to spend stock

market windfalls.

Fed easing can still help boost exports

by pushing the US dollar down but this

does not work if other central banks are

trying to do the same thing.

Meanwhile, households’ rising levels

of interest-bearing assets — which

include bonds and savings accounts,

and are about 50 per cent larger than

interest-bearing liabilities — magnify

the negative effects of lower rates for

savers.

Finally, the psychological effects from

monetary easing are also largely

negative as consumers take signs of Fed

easing as a reason to worry about reces-

sion and to delay borrowing until rates

fall further.

From today’s starting point of already

super-low rates, then, the net economic

impact of further monetary easing on

the US economy may well be negative.

This is likely also the case in Japan and

the eurozone.

Central bankers including the Fed

take a different view and will probably

continue to respond to recession fears

with monetary stimulus next week.

Further out, policymakers will probably

continue to deploy conventional and

unconventional monetary stimulus.

To the extent that they do, they are

contributing to an era of continued slow

growth andlow inflation.

David Kelly is chief global strategist,

JPMorgan Asset Management

Monetary easing

medicine turns

into poison

Consumers take signs of

Fed easing as a reason to

worry about recession

and to delay borrowing