Offshore
Investment Advice
Mixed news this month from the bond markets with a number of
commentators pessimistic about the US market whilst expressing
more confidence in Europe.
Largely, as you might expect, this is because of the pressure
on interest rates.
HSBC, in its Investment Update newsletter, summarises the global
situation thus: “We expect that the US Federal Reserve
will increase rates by the end of the year. In the UK we maintain
the belief that interest rates are likely to rise over a 12-month
horizon, albeit modestly, with the outlook fairly similar in
continental Europe. In Japan, the overnight call rate is expected
to stay close to zero as the Bank of Japan holds its accommodative
monetary line.
Offshore Investment Advice - Offshore Investment Report
Perpetual, in its October Offshore Investment Report, stresses
monetary policy is tightening everywhere.” The US Federal
Reserve has twice raised rates by 0.25 per cent, the Bank of England
raised rates to 5.25 per cent and European Central bank president
Wim Duisenberg has said his bias to tighten ‘continues to
creep in’” .
“Increasing flows of positive economic news and rising
commodity prices are essentially negative for bond markets and
we seen no chance of further interest-rate cuts from any central
bank in the medium term.” Perpetual makes the point that
corporate bond spreads remain wide, and emerging market debt
is facing multiple challenges in the form of over-supply of
new issuance, concerns over Y2K’s impact on emerging-market
financial systems and economies. And Ecuador’s debt default
has done little to boost sentiment.
“We see little chance of a meaningful rally in government
bonds until there are convincing signs of slower economic growth,
the best chances for which are probably in the USA,” it
says. Pictet points to inflationary pressures in the US. “Though
lending growth has been speeding up, this demand has not fed
through into higher finished product prices,” it writes.
“But inflationary pressures are building upstream due
to spikes in oil, food and intermediate goods prices.
Offshore Investment Advice & The Fed Funds Rate
“This situation will doubtless spur the Fed into pushing
up the Fed funds rate again, especially as demand may well be
boosted around the turn of the year with inventory levels currently
looking very run down.
“The Fed’s probable move is weighing on the bond
market which has already taken it for granted. Over the summer
months, Treasury yields rose by 10 basis points on all maturities
over one year. However, around the year end, the yield curve
may well become deformed and distorted as a result of probable
Y2K-related liquidity problems.” In the UK, Pictet expresses
surprise that the Bank of England’s Monetary Policy Committee
chose to be pre-emptive with its latest rates rise.
“This very ‘activist’ MPC will certainly
tighten monetary screws further but, with inflation to remain
muted - at least for the foreseeable future - market anticipations
seem too pessimistic. We think rates will only rise to 6.25
per cent next year,” it says.
Offshore Investment Advice - Long Term Rate
“Given the scale of the reduction in the long-term rate
spread between the UK and Germany witnessed over the past year
or so, and considering the fact that the UK economy is once again
ahead of the euro-zone cycle, the recent widening in the ten-year
bond yield spread is likely to extend further over the next few
months.”
Pictet suggests recent economic developments have shown that
the pound is probably less overvalued than generally thought.
“We still think that when the euro appreciates further
against the dollar, it will also gain ground against sterling.
However, the movement is likely to be much more limited than
widely expected a few months ago.”
BT Funds Management, in its Pyramid newsletter, remains fairly
negative US bonds, due to its expectation that activity data
will remain strong. It believes that the neutral tone accompanying
the interest-rate rise understates these risks.
Offshore Investment Advice - The ECB
However, it is more bullish about Europe. “We continue to
look for a solid growth recovery in Europe in the second half
of 1999. Whilst we expect that the ECB will respond pre-emptively,
we are not expecting a rate hike this year given recent comments
from EU officials,” it says.
More generally, falling inflation and savings rates are stimulating
interest in corporate bonds, suggests Gartmore.
Whilst the group realises it has a job on its hands convincing
investors. many of whom still regard bonds as “exotic
creatures”, it stresses that the supply of corporate bonds
is also growing, a result of the rising cost of alternative
forms of finance such as bank loans, advances in technology,
greater deregulation and intensifying corporate activity.
Cayman Offshore Banking
Cayman audits its banks overseas
The first onshore inspection of overseas subsidiaries of Cayman
Islands’ banks has taken place in Central America.
The inspection was carried out by the Cayman Islands Monetary
Authority (CIMA), the islands’ financial regulatory authority,
to help assess banks’ risk-management practices, establish
first-hand knowledge of banking and business practices in Latin
America and to implement CIMA regulations.
Senior specialists from CIMA visited Panama, Costa Rica and
Nicaragua, while a local team also met with the banks’
external auditors from Puerto Rico.
Offshore Investment Advice & The Inspection Unit
The inspection unit, which began operations in 1998, will concentrate
on the 110 banks where Cayman is the home-country supervisor.
CIMA is required to carry out on-site inspections in three-year
intervals, with more frequent reviews if problems emerge.
Meanwhile, CIMA has successfully implemented its internet-based
financial regulation system. By the end of March, approximately
85 per cent of the locally-registered banks, trust companies
and other financial institutions used the system to file their
legally-required quarterly report.
Luxembourg gets
Y2K all-clear
Operators in the Luxembourg banking sector have announced their
readiness for the Year 2000.
The Duchy’s Financial Sector Supervisory Commission (CSSF),
the Luxembourg Central Bank (BCL) and the Luxembourg Bankers
Association (ABBL) began preparations two years ago, setting
in motion a series of measures to avert problems of Year 2000
transition.
Prominent bodies involved in the process included the international
securities clearing house Cedel, the electronic payment agent
Cetrel and the Luxembourg Stock Exchange.
Offshore Investment Advice - From Manx Cat To Tiger
From Manx cat to tiger
The Isle of Man has been dubbed the new ‘Celtic tiger’
following the announcement that it has the fastest growing economy
in Europe.
GDP grew by 8.5 per cent and GNP by 9.5 per cent in real terms
during 1997/1998, outstripping the UK, France and Germany which
had growth rates of 3.5 per cent, 2 per cent and 1.8 per cent
respectively.
The greatest economic expansion was in the financial services
industry, which grew by 15 per cent. Corporate profits rose by
almost 20 per cent in cash terms over the year and personal income
by 6.5 per cent.
Chief minister Sir Miles Walker attributed the growth to the expansion
of domestic business and the introduction of major international
business to the island.
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