The good news has been further promising signs of recovery, which is starting to look like the real deal. The counterpoint has been a constant reminder that all this could be taken away.
We expect this theme to continue as we move into September and markets wake up from their summer daze.
The transition from recession to recovery will be full of mixed messages and we can expect a volatile end to the year as uncertainty over the true state of the economy mounts.
The good news/bad news theme is present in almost all the data released this week, but most noticeable in the UK property market.
House building is recovering, which is a key indicator of an economic recovery, but at the same time there have been reports this week of a potential housing bubble.
We think fears of a housing bubble are overblown as a strong housing market encourages developers to enter the market and boost supply, something that has been sorely lacking in recent years.
UK: Mortgage lending and manufacturing activity up
The UK property market has strengthened further, as gross mortgage lending was shown to have grown 12% from June to £16.6bn in July, which is the highest since October 2008 and 29% higher than the same month last year.
This has been spurred on by the government’s ‘Help to Buy’ scheme, designed to help first time homebuyers in particular.
Many believe that a healthy property market supports a stronger economy, but there are concerns of property prices rising to unsustainable levels.
Recovery was also hinted elsewhere as manufacturing activity surged to a two-year high in the three months to August, with a net 16% of UK manufacturers surveyed reporting a rise in output.
While online retail sales fell for the first time in 13 years during July, down by 2% since June.
However, this does not appear to be a shift in long-term trends, as purchases made on mobile devices have grown 129% year on year.
US: General consensus to taper QE later this year
Minutes released from the Fed’s July meeting reveal a general agreement for the tapering of QE later this year, scaling back the $85bn monthly purchase of assets that are currently occurring.
However, there was some disagreement as to whether the economy is strong enough to begin tapering in September, and also if the 6.5% unemployment threshold to start raising interest rates should be lowered.
They are quite right to be cautious; reducing the amount of cheap money flowing into the system whilst simultaneously raising interest rates, could wreak havoc on the US economy in its fledgling recovery stage.
Fear of rates rising has already caused US home buying to surge as people attempt to lock in mortgages at a low rate, with sales of previously owned homes increasing 6.5% last month.
EM: Currencies weaken as money flows out
Capital continues to flow out of emerging markets as risk appetite decreases following the Fed’s minutes’ release regarding tapering.
Currencies of developing countries in particular are weakening at frightening rates against their developed nation counterparts.
For instance the Indian rupee and Brazilian Real have continued to fall against the dollar, despite intervention by the Reserve Bank of India and Brazil’s Central Bank; the Indian Rupee is at an all-time low, and year to date the Brazilian Real is down 16.35% against the US$.
This poses risks for funds exposed to EM equities and debt; since for governments and corporations in these regions that have relied on foreign investment to finance their operations, a weak currency will increase the cost of existing foreign debt obligations (e.g. loan interest payments payable in US$), and capital outflows will act to raise bond market yields, increasing the cost of future borrowing.