THE FEDERAL RESERVE START THINKING ABOUT THINKING OF TALKING ABOUT TAPERING

THE FEDERAL RESERVE START THINKING ABOUT THINKING OF TALKING ABOUT TAPERING

Minutes from the July meeting of the Federal Open Market Committee released this week contained the first whispers of a reduction in the United States $120bn asset purchasing programme. Jerome Powell, chairman of the Federal Reserve, said “there are a range of views” on when is the appropriate time to start tapering bond purchases. This news had a ripple effect on the markets that extended far beyond the US as major indices across Europe turned red.

While notes from a meeting last month can change the course of global markets in a day, the rapid and mostly peaceful conquest of Afghanistan by the Taliban did not have much effect. The most significant movement caused by the sudden change in government was Pakistani government bond prices falling 1 per cent. With most of its wealth held outside of its borders, frozen in international accounts, running the country will likely prove to be far more challenging than capturing it in the first place.

GLOBAL: EQUITIES FALL AHEAD OF FED MINUTES

The minutes from the Federal Reserve’s July policy meeting caused volatility in the markets as many policymakers showed an interest in easing the central bank’s stimulus programme later this year. The central bank’s $120bn a month in asset purchases have been a key pillar in assisting the growth of many equity markets from the depths of the pandemic in March 2020. However, given the rapid improvement of the US labour market and sharp rise in inflation, central bankers are now preparing their exit from the extraordinary measures.

Several major equity markets showed signs of rattling following the announcement. London’s FTSE 100 and the Europe Stoxx 600 both dropped around 2 per cent, and Wall Street’s S&P 500 also fell 1.4 per cent. Meanwhile, the dollar rose to its strongest level of the year, putting the US dollar in a strong position in comparison to other global currencies.

EU: EUROZONE INFLATION HITS ECB’S TARGET

Eurozone inflation passed the European Central Bank’s 2 per cent inflation target this month as it reached 2.2 per cent in year-on-year figures, rising to its highest rate in since October 2018. The underlying pressures remain muted as the increase was largely driven by energy prices which contributed 1.3 per cent to the total inflation. Despite substantial growth, there appears to be no concern that the will change ECB its policy as the figures released are in line with the predictions of inflation going above the 2 per cent target in the short term in order to bring the economy back to its pre-pandemic levels in coming months.

GDP in the euro area also saw a rise to 2 per cent and employment increased to 0.5 per cent as vaccination speed has picked up and Covid restrictions have been eased. This followed a 0.3 per cent contraction in the first quarter, which has put the Europe back on track to achieving full recovery.

EQUITIES: FTSE 100 TO LOSE BHP AS IT PLANS MOVE TO SYDNEY

BHP, the second largest global mining company by revenue, has announced plans to move its primary stock market listing to Australia. The Anglo-Australian multinational also announced a deal to sell the oil and gas arm of its business to Woodside Petroleum, an Australian company. These plans could still face strong opposition from UK shareholders that would be forced to sell their shares once the company is removed from the FTSE 100.

This story is reminiscent of Unilever, who tried to unify into a single Dutch company in 2018 but was forced to drop the plans and later consolidated in London. CEO of BHP Mike Henry is more hopeful investors will see the benefits of unification and stressed there will still be a secondary listing available in the UK. Mining companies have greatly benefited from increasing commodity prices and rising demand in China as production recovers from the pandemic. BHP recently announced their largest ever dividend of 10 billion US dollars, after doubling their profit in the last 12 months.