Category: Keith Knutsson

London is currently the financial center of Europe. However, with recent Brexit negotiations, this is now under threat. Amidst all this, the Bank of England is aiming to retain its status as one of Europe’s most powerful banks.

In December, the Bank of England said it will give commercial banks and big European investment an easy way to stay in London once Britain quits the European Union. It will offer them the same terms that big U.S. and Swiss banks get. It warned, however, that this setup will require deep cooperation between EU and U.K. regulators.

Brexit will affect the financial industry. The financial sectors is a big source of exports to Europe, representing 90% of Britain’s trade surplus in services with the Eurozone. It also provides more than a 10th of all tax revenue in the U.K.

Currently, London’s role in Europe relies on passporting. This allows any bank in one EU country to sell products and services in any other. That is what lets banks from all over the world use London as a base to serve European investors and companies.

The passporting regime will end with Brexit, and European legislators say it is unlikely to ever be replaced by a free-trade deal for services. The Bank of England’s decision can be seen as a gesture of goodwill. It does nothing to actually ensure that Europe will give banks in London future access to the EU.

If London preserves its financial hub status after Brexit is entirely implemented, this could stir up trouble for later. The U.S. and EU are already moving in a different direction by forcing foreign banks to set up onshore holding companies that require their own funding, capital, regulation.

This leaves Britain potentially at a disadvantage when banks fail. Allowing all big banks to operate as branches means that when financial trouble strikes, the U.K. will have no choice but to rely on the cooperation and forgiveness of overseas regulators.

U.S. manufacturing activity slowed modestly for the second straight month in November, but the reading still shows a favorable factory sector. On Friday, the Supply Management Institute said its manufacturing index fell to 58.2 in November, but remained solidly in growth mode. A reading above 50 indicates activity is expanding across the factory sector, while a number below 50 signals contraction.

The slowdown of the sector’s expansion was driven by a decrease in inventories and a slower rate of growth in deliveries from export order and suppliers. Employment growth cooled just slightly. On the other hand, other components of the index showed strength for manufacturing. Overall new orders are rising at faster rate, and production increased.

Recent data shows that the manufacturing sector is on a steady growth path heading into 2018. Furthermore, factories dealing with disruptions due to the impacts of the hurricane season are now back to full production.

According to the U.S. Commerce Department, orders for durable goods are advancing this year at the best pace since 2014. This comes as a result of stronger investment in machinery and equipment by U.S. businesses. The recent recovery in the Energy sector has fueled manufacturing demand as well as demand for capital machinery. The consumer-price index increased 2% from a year earlier in October.

“Currently, demand is prevalent in all sectors. Therefore, the following manufacturing performance should carry forward into the new year” said Keith Knutsson of Integrale Advisors.

The UK’s interest rate hike was viewed as a one-time move despite the statements of the Bank of England. The British pound fell and investors viewed the quarter-point rise as a dovish development. Going forward, will markets be swayed by hawkish talk from the BoE?

Factors that are depressing the possibility of another rate hike include a slowing economy, Brexit uncertainty and retreating inflation. So, despite Ben Broadbent’s stating, ‘We anticipate a couple more rate rises to get inflation back on track,’ markets are seemingly not pricing in more than two rate hikes. While several investors are expecting additional rate hikes to control the 3% year-on-year inflation figure, the high inflation number is mainly caused by a fall in value of the pound. The inflationary impact of a lower pound is transitory and will slowly dissipate in 2018. A better reasoning for more rate hikes should be derived from the tight labor market; the current unemployment rate is at the lowest level since 1975, which will drive future wage growth up.

Keith Knutsson of Integrale Advisors was rather skeptical of such an argument by stating, “while it is very well possible that wage growth picks up looking forward, it has been sluggish despite the shrinking unemployment numbers – real wage growth has actually decreased! What follows is a risk of the economy tilting downside.”

With fears of slowing growth hovering over the Bank of England, it seems unlikely that the rate hikes will occur as presented. An improper approach by the BoE could shift households and businesses towards panic.