The British fans travelled all the way to Brazil to watch the World Cup maybe slightly disappointed with their soccer team performance. However, they certainly enjoy the strength of the British Sterling which is at a 5 years high against US Dollar. Sterling rallied through 1.70 level, the highest since October 2008. The Sterling has risen 14% against USD and 11% against EUR since July, 2013. GBP 1 was USD 1.4861 on 10 July, 2013 and USD 1.7040 on 20 June, 2014. During the same period, GBP was EUR 1.1269 and EUR 1.2510 respectively.
Just as the World Cup started, the Bank of England chief, Mr Carney, gave the first sign that there may be a rate increase as early as this year. He said rates could rise from their historic low of 0.5pc “sooner than expected”. He made such comments in the annual Mansion House Speech and the British pound rallied to a five-year high against USD. The Bank of England could be the first major central bank to increase rates, ahead of the Euro zone and US.
The FTSE 100 has spent May and June testing 6900 level on the upside and it may get harder with the backdrop of increasing interest rate. The bulls and the bears in the stock market have different interpretation on Mr Carney’s words. The bulls would think that Mr Carney is concern about inflation and the monetary policy being too loose for too long. The economy recovery is in good shape and it is time to tighten up the monetary policy with a bit of a rate hike. The bulls would take these positively and hope stronger economy means good news for listed companies earning growth. Stronger Sterling could mean more asset allocation from insurance companies, pension funds and other financial institutions. The bulls hope for more institutional money pouring into GBP investment meaning the Gilt, corporate bonds in GBP, UK stocks and UK properties. All these could mean more upside for the UK stock market.
The bears in the stock market think the glass is half empty as they are worried that the UK stock market is at its peak and could be running out of steam. An increase in interest rates makes bonds more attractive and there could be money getting out of the stock market and flowing to GBP bonds. Money outflow from stock market means selling pressure and negative for share prices. Increase in interest rate also increases business operating cost as most business are borrowers and hence could hurt earnings of listed companies. Weaker earnings could lead to weaker share prices.
Investors may ask if UK
stocks could be at or near its peak, how about the US stock market which seems
to be making new highs every other day. Federal
Reserve chair Janet Yellen continues to tighten up its monetary policy. On 18 June, Yellen announced Federal Reserve
would reduce its asset purchase program by USD 10 billion to USD 35 billion a
month. In December 2013, the Fed started
cutting USD 10 billion from its USD 85 billion monthly asset purchase program. The stock market, taking S&P500 Index as
benchmark, has gone up 7% since beginning of the year (as of 20 June,
2014). One could see the tightening in
monetary policy has not marked the peak of US stock market Bull Run.
Look at a few US tech giants
to get a sense of the American dreams.
Apple is paying USD 3 billion for Beats that make trendy headsets. Apple share price has been matching strongly
and it is up 57.6% in a year. As of 20 June,
it is at USD 90.91 and on an uptrend to challenge its historical high in Q4
2012 which is equivalent to USD 100. At USD
548 billion market capitalization, paying USD 3 billion for a headsets company
is not going to hurt much even if Apple has overpaid. Google is buying Skybox for USD 500 million. Skybox is a satellite company and Google
hopes to use Skybox’s satellite to improve its digital maps quality. Think of the street views in Google map getting
significantly better. Again, USD 500
million for Google, a USD 378 billion company is decimal point. Google’s YouTube is also planning to launch
music streaming services that offer access to millions of songs for a monthly
subscription. This is clearly taking on Spotify
and iTune. Today’s human life is very
much reshaped by tech giants like Apple and Google. They can make revenue from almost every
corner of the planet and every soul in the world. They either charge the individuals or the
merchants who want to reach the individuals.
