It will be a major shock to markets if the U.S. Federal Reserve announces an increase in interest rates at its meeting on Sept. 20-21. A survey last week of 46 Wall Street economists by the Financial Times shows only six economists, or 13%, expect Chair Janet Yellen to increase interest rates. Interest-rate futures suggest a 30% probability of an upward movement — the gauge has historically been more skeptical of increases than economists.
Expectations of an increase in U.S. interest rates have been drained by slower-than-expected growth in jobs and signs that the service sector has lost momentum. Nevertheless, interest-rate futures indicate that the probability of an increase in December is almost 60%, and two-thirds of the economists polled by the FT agree.
Pressure is rising on the managers of active funds following confirmation that index-tracking funds have continued to increase their share of assets under management. These "passive" funds now account for one-third of mutual fund assets in the U.S., compared with one-quarter in 2013. This represents an increase in assets of US$2.0 trillion to some US$5.0 trillion in the U.S. over the past three years.
Negative bond yields continue to make news. On Sept. 6, Germany's Henkel and France's Sanofi became the first public companies to sell euro-denominated bonds at a negative yield. The radical change in European financial markets follows the European Central Bank's decision to charge for keeping money with it. There is extra incentive to invest as it costs money to hold cash, which is expected to drive mergers and acquisitions.
Another trend is the growing global investor interest in emerging markets. The MSCI Emerging Market index — a benchmark of middle and large market capitalization companies in 23 countries — is up more than 16% this year, and sales of European mutual funds that invest in these markets recently reached a 42-month high.
According to data provider Morningstar, almost €9 billion was invested in Europe-domiciled emerging-market funds during July. This is the highest level since January 2013. The appeal is not hard to find; ten-year, dollar-denominated sovereign bonds issued by Brazil, for example, pay investors 4.5% annually. The total stock of emerging market bonds, and other tradable debt, is an estimated US$18.5 trillion.
Brexit continues to confound and confuse forecasters. More than two months after the U.K.'s June 23 referendum on membership in the European Union, economists are withdrawing their predictions of a domestic recession. Sterling briefly climbed to a two-month high of over US$1.34 last week, although this was largely a reaction to the publication of poor U.S. services data.In commodity markets, coking coal has been the undoubted star of the past month, rising 80% since the end of July to reach US$180 per tonne (premium quality coal delivered to China). Coking coal started the year at under US$80 per tonne and has now risen 130% thanks to increased demand from Indian steel mills and China's decision to shut polluting mines and to restrict annual working days to 276 from 330. The restrictions have been exacerbated by heavy rains in China's northern coal mining region of Shanxi.
The benefit to miners will not be immediately evident, as only one-third of the 280 million tonnes of seaborne coking coal is traded on the spot market, with the bulk being subject to quarterly contracts. The main beneficiary will be BHP Billiton Group, which sells a high proportion of its coal on spot markets, using an index-based pricing system.
To target Chinese commodity traders, Hong Kong Exchanges and Clearing is planning to open a physical metals-trading platform in mainland China. The company, which acquired the London Metal Exchange in 2002, said the exchange in Qianhai would be underpinned by an LME-style warehouse system for physical delivery of the metal.