28 April 2015

Market comment: China joins the QE Club

Our domestic market has failed to surrender any of its recent positive momentum, despite a lack of progress in a number of important areas, such as Greece and Ukraine

First and foremost will be the imminent meeting of the Federal Open Markets Committee (FOMC). This body, the US equivalent of our own Bank of England’s Monetary Policy Committee, sets interest rates and could provide a steer as to when the policy of cheap money will finally come to an end. The Federal Reserve Bank is clearly nervous that tightening too soon could stunt the economic recovery, but rates will have to rise at some stage.

Meanwhile, China appears to be embarking on its own version of quantitative easing. The background is a massive rise in local authority borrowing. The People’s Bank of China PBOC) appears prepared to purchase municipal bonds to aid liquidity and allow expenditure at a local and regional level to continue. The news was sufficient to send shares in Shanghai soaring. The result will be to expand the PBOC’s balance sheet, in much the same way as has happened to the Federal Reserve Bank in America. Their view seems to be that it worked for the Americans, so why not for us?

Elsewhere banks are very much in the news at present. Speculation that HSBC might shift its headquarters overseas saw the shares leading the risers in the FTSE 100 Share Index. This could mean that the old Midland Bank operation is spun off into a separate entity, which would be ironic, given that a condition of buying it in the first place was that HSBC should shift its HQ from Hong Kong to London.

And results from both Royal Bank of Scotland and Lloyds Banking Group are due shortly. There will also be trading updates from a number of leading businesses. Indeed, it is expected that over 30% of the companies that go to make up the S&P 500 Share Index – one of the most followed in the US – will be issuing profit figures this week. As if that is not enough, UK consumer confidence figures, a CBI report into the retail sector, consumer credit and mortgage approval numbers and the first of the Purchasing Managers’ Indices are coming soon. It feels like information overload - and next week we have the election!

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