US is where it all happens this week

Allister Heath
IT used to be the case that the most important market-moving news for the FTSE 100, sterling and the UK fixed income markets often came from the US. While that remains largely true – London traders become fixated with Wall Street the moment it opens – Chinese statistics have now become almost as important for all global markets, increasingly superseding even American news. The Chinese purchasing managers index for manufacturing is now an extremely influential statistic. When America sneezes, the rest of the world still catches cold; the difference is that there is more than one country that can contaminate the rest of us when it falls ill.

This week will therefore have a retro feel to it: the most relevant events for London’s economy will all be taking place in America. These stories will be far more significant than the latest micro-development in UK politics, or even the outcome of the Bank of England’s meeting, which will see no change to anything (it will be boring, and a good thing too).

Far more interesting will be the Fed’s move on QE2: a massive increase in government asset purchases on Wednesday has already been priced in by the markets. The trouble is that this is unlikely to make much impact on the economy, as the Fed’s own models show. It is also worth reminding ourselves that US GDP, which grew by 2 per cent annualised in the third quarter according to preliminary official numbers out last Friday, is not in recession. It is growing, albeit too slowly to create enough jobs. It is therefore highly dubious whether there is really any justification for QE, especially given that few analysts seem to believe in its efficacy at the doses contemplated. What really seems to be happening here is a disastrous return of the old Greenspan put – Fed intervention whenever anything isn’t going well enough. Moral hazard is back with a vengeance.

Even more interesting will be the result of the mid-term elections, though many over here may fail to understand their significance correctly. Barack Obama’s Democrats will be defeated heavily; the Republicans, fuelled by grass-root activists, including quasi-libertarian Tea Party members, are set to regain the House of Representatives. They are likely to fall short of clinching the Senate; the upshot will be gridlock. Very few new laws will be passed in the US over the next two years. Crucially, various taxes are about to go up automatically, unless a deal is negotiated urgently, which will trigger a massive row between Republicans and Democrats. Capital gains tax – as well as income tax – will be among those affected; this could push US equity values down substantially as returns will now be much lower as a result of the tax increase. London will feel the fallout.

Another major issue is the row over home foreclosures in the US, caused by banks and lenders using the wrong paperwork to repossess homes. In the main, the right homes are being grabbed, albeit via the use of technically illegal processes as a result of gross stupidity and incompetence. The halting of repossessions is slowing down the normalisation of the housing market and bank balance sheets and could yet engulf the US-based financial giants into another storm of litigation and crisis, affecting people employed by those firms in the UK.

These are the sorts of issues that should be uppermost on London-based investors’ minds this week. Globalisation is back, warts and all.