Share prices are tumbling.
Bank shares are being clobbered. There is talk of a US recession, induced by a strong dollar that is already causing havoc in China, much of the rest of Asia and Latin America. In the good – or bad – old days, we could predict what the chair of US Federal Reserve would do in these circumstances. Alan Greenspan would cut interest rates, or hint at his intention to do so.
Is Janet Yellen, Greenspan’s successor but one, of similar mind? If she is, she has an opportunity to say so on Wednesday when she begins two days of testimony before Congress. This event has suddenly assumed an importance that seemed unlikely when the Fed raised interest rates last December for the first time since 2006.
Back then, investors cheered the early evidence of “normalisation” in monetary conditions. Stock markets rose and few were troubled by the thought of four quarter-point increases in US rates in 2016. The economy looked strong enough to take it.
Two months later, and investors are screaming for relief. The central banks of Japan, the eurozone, and the UK have turned their dials to dovish in the face of weakening global growth, and now the same is demanded of the US. Some even argue that the Fed should reverse December’s tweak, not just signal delays to further rises.
Yellen plainly won’t go that far. But she could join her colleague William Dudley in warning that additional strength in the dollar could have “significant consequences” for the US economy. That would be a sure sign that a rate rise in March is off the agenda.
Embarrassing for Yellen? Absolutely: the Fed, having trailed its plans for a year, cannot have expected to hit a hurdle so soon. But embarrassment is better than ploughing on regardless. The basic fact is that the world economy, and the US, looks weaker than two months ago.
That fragility is deeply alarming but, for the Fed’s credibility, a small about-face now is better than a big U-turn later. Yellen should delay a rate rise – not for fear of igniting more turmoil in financial markets, but because the economic weather has deteriorated.
HSBC: should we stay or go now?
Even HSBC can’t prolong the suspense much longer. A decision on whether to stay in London or go is imminent. Having pondered the question since last April, the board can’t credibly delay beyond the full-year results on 22 February.
London is now deemed by outsiders the warm favourite, which should not be surprising. Chancellor George Osborne has performed contortions in pursuit of his “new settlement” with the banking industry, rejigging the bank levy to the benefit of mega banks such as HSBC and to the disadvantage of the “challenger” banks that were once the politicians’ favourites.
Meanwhile, the supposed allure of Hong Kong has surely faded in the past year as Chinese regulators have shown themselves to be variously naive and incompetent when trying to manage the inevitable popping of their stock market bubble. Hong Kong may still formally enjoy the “one country, two systems” model but, when contemplating moving a bank the size of HSBC, it’s the 20-year, or 30-year, outlook – which remains obscure – that matters.
The decision lies with HSBC and its shareholders, of course, but we can make one plea. If London is the winner, HSBC should commit for a decade or so. Anything less and its board would look as if it is addicted to prevarication.
Rolls-Royce must stay in the driving seat
The debate over Rolls-Royce’s dividend seems more of a non-debate. Nine times out of 10, roughly speaking, companies that say they will “consider” changes to their dividend policy – as Rolls did last November – end up cutting.
It is true that Rolls’ balance sheet is not under severe strain, even after five profits warnings in two years, but there’s no point giving credit rating agencies an excuse to grumble. Downgrades could affect the Rolls’ negotiating clout when signing 20-year service contracts on engines. Stay away from that slippery slope. A near-halving of the dividend would save £200m a year. It all helps.
In fact, the more interesting question for Friday’s full-year results is whether Rolls will grant a seat in the boardroom to ValueAct. The US activist hedge fund is a 10% shareholder in Rolls and its request for a seat needs to be answered. The view here remains the same: just say no.
ValueAct may be co-operative in style but there is no guarantee that it wants to stay for the long-haul, which is what a seat in the boardroom should mean. Chairman Ian Davis should keep it simple and remember that managers are paid to manage.
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