Market updates from April
In a Nutshell
In the UK, the Bank of England forecasts a £100bn payment from the Treasury by 2023 due to quantitative easing losses. Europe’s economy showed weak growth in Q1, whilst the US economy also showed slow growth as the Fed is pushing interest rates. Chinese RMB Yuan has surpassed the US dollar and is attempting to become the preferred trade currency for BRICS.
Bank of England forecasts £100bn payment from Treasury over QE losses by 2033
According to estimates by the Bank of England, the UK Treasury will have to cover a £100bn loss by 2033 due to its bond-buying quantitative easing program.
This was anticipated and reflects both the continuing cash flow losses of the program and gains or losses made by the central bank when government bonds mature or are sold.
The transfer of funds between the Treasury and the BoE is accounted for in public finance projections and does not impose any additional strain on taxpayers. The BoE conducts quarterly evaluations to anticipate future money transfers that it will either pay to, or receive from, the Treasury under the indemnity agreement signed in 2009.
The QE program was initially profitable because overnight interest rates were close to zero and the government bonds purchased by the BoE still paid significant interest.
However, as interest rates have risen to the current value of 4.25%, the BoE is now transferring money to commercial banks at a higher rate than the current yield on government bonds owned by the central bank.
If the Bank of England sells its bonds under the £80bn-a-year quantitative tightening program, it is expected to receive lower values than the purchase price due to the increase in bond yields, resulting in a fall in prices.
The central bank stressed that these figures were estimates and subject to uncertainty, and the OBR noted that the flows of money between two arms of government have always been included in debt-servicing cost estimates.
EU economy shows weak growth in Q1
The eurozone's economy grew by 0.1% in Q1 2023, but this figure was lower than expected due to stagnation in Germany. The region’s economy is 1.3% larger than in Q1 2022, but weak growth is forecast for the rest of the year. The growth figure, coupled with high inflation in several eurozone countries, presents a challenge to the ECB’s rate-setters, who will decide whether to raise borrowing costs when they meet next month.
US Growth slows sharply in first quarter as the Fed pushed rates higher
The US economy grew at a slower pace than expected in Q1 2023, with GDP increasing by 1.1%, compared to the predicted 2%.
The personal consumption expenditures price index increased by 4.2%, ahead of the 3.7% estimate, indicating inflation is still an issue.
The slowdown was due to a decline in private inventory investment and nonresidential fixed investment. However, there was an acceleration in consumer spending, an upturn in exports, and a smaller decrease in residential fixed investment. The increase in consumer spending reflected increases in both goods and services, with the leading contributors being motor vehicles and parts in goods, and health care, food services and accommodations in services. The increase in state and local government spending primarily reflected an increase in compensation of state and local government employees. Meanwhile, imports turned up, reflecting an increase in mainly durable consumer goods and automotive vehicles, engines, and parts.
Despite this, stocks rose and Citigroup economist Veronica Clark stated that the signs of strong demand and rising prices indicate an inflationary report.
Meanwhile the Federal Reserve has been raising interest rates to slow the economy and combat inflation, with growth expected to decrease later in the year.
Chinese Yuan domination with BRICS
The Chinese Yuan has surpassed the US dollar for the first time in history as the most widely-used currency for cross-border transactions in China, reflecting Beijing's efforts to expand the Yuan's global reach.
The State Administration of Foreign Exchange reported that cross-border payments and receipts in Yuan increased to a new high of $550 billion in March, up from $435 billion the previous month. This achievement comes as China seeks to promote the use of the Yuan in trade and capital markets, while also establishing non-dollar trade agreements with countries like Brazil, India, UAE and other African nations.
In addition, the Yuan has become Russia's most traded currency, surpassing the dollar, since being largely isolated from global finance due to its invasion of Ukraine.
Beijing and Brazil have agreed to conduct their trade and financial transactions directly by exchanging RMB Yuan for Brazilian Real, instead of using the US dollar as an intermediary. This agreement includes plans to expand cooperation on food and minerals, as well as the creation of a clearinghouse that will provide settlements without the US dollar, and lending in national currencies.
The objective of this move is to reduce transaction costs and US dollar dependence in bilateral relations. The People’s Bank of China (PBOC) believes that such arrangements will boost the usage of the RMB Yuan for cross-border transactions between enterprises and financial institutions in the two countries, and further facilitate bilateral trade and investment.
Currently, 25 countries are already making settlements with China in RMB Yuan, according to Tatiana Rosito, the Secretary for International Affairs at Brazil’s Ministry of Finance.
The general trend of slow economic growth across major economies in Q1 of 2023 has heightened market volatility and may test some investors. Increasingly, as we look toward the second half of 2023 and into 2024, maintaining focus on long term investment objectives and sticking to a robust financial plan will be key to weathering the current market inflections. Ensuring your assets are diversified across an appropriate portfolio of asset classes (including a sufficient cash reserve), in line with your risk appetite, is the best strategy to help ensure you’re able to successfully navigate market volatility.
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