WeekWatch

A market friendly Fed pick?   

Many commentators welcomed the nomination of a previous (and the youngest ever) Fed governor, Kevin Warsh, as the next Fed chair. They approved of Warsh’s anti-inflation credentials at a time when US inflation is nearer to 3% than the 2% target. He will be responsible for overseeing Fed action on interest rates once current chair Jerome Powell’s tenure ends in May. Stock markets weakened on the assumption this could make near-term rate cuts less likely. Carlota Estragues Lopez, SJP’s equity strategist, noted that “US equity markets reacted negatively to Kevin Warsh’s nomination as the next Fed chair. Investors view his policies as less supportive of interest rate cuts, extrapolating his hawkish attitudes in the past”. 

Hetal Mehta, chief economist at SJP added that “we know President Trump wants interest rates to come down, but whichever way Warsh decides is best for interest rates, it’s unlikely he’s going to swing the whole FOMC (the Fed committee which sets interest rates) in his direction near term”. 
Hetal also noted that “there is still a quite a process before Warsh gets confirmed. This is probably not going to happen very quickly, given everything else that is going on politically in the US”. 

During his second term, President Trump has proved a critic of the Fed. He has made clear his desire for lower interest rates and a weaker dollar, both of which could prove inflationary. Assuming his confirmation is approved, Warsh may face challenges to the Fed’s independence. The White House is currently seeking the removal of one Fed governor while the current chair Jerome Powell is under criminal investigation. 

Why was there an end of month rout for silver and gold? 

On the last trading day of January, the silver price fell 31% in dollar terms by market close. During the day, it had been even weaker. It was this metal’s largest intra-day peak to trough fall in history. The gold price suffered a smaller correction, falling by 11% to just over $4,700 a troy oz. This was another one for the record books, reflecting the largest one day fall for gold since 1980. Both metals still rose over the month, with gold rising by 9% and silver by 17%, both in dollar terms. 

Some analysts suggest the catalyst for these metals’ sell off was the announcement of the new Fed chair who is expected to prioritise lowering inflation. 

This would mean less chance of near-term cuts in US interest rates. On that basis, continuing weakness for the dollar becomes less of a sure bet. Precious metals, which have benefited from expectations that the dollar will continue to weaken, known as the “debasement trade”, gave up some ground with investors closing positions and taking profits. Greg Venizelos, fixed income strategist at SJP, noted that “with Warsh as a credible candidate, the debasement trade has gone into reverse. It was a strong session for the dollar on Friday”.  Yet some analysts point out that other supports for gold remain in place, including central bank buying as well as asset diversification, geopolitical uncertainty and higher volatility. 

Election fever in Japan drives bond yields higher

The build up to Japan’s election on February 8 was overshadowed by the speculation about the next Fed chair and Trump’s fall out with allies over Greenland. Yet the result could have implications for global markets. Some investors see parallels between the Japanese prime minister Sanae Takaichi’s and then-UK prime minister Liz Truss’s 2022 stimulus packages. Truss aimed for unfunded tax cuts, while Takaichi is promoting an extensive stimulus package. Should voters give Takaichi a resounding green light for her policies, some investors fear that the Japanese economy could be vulnerable to higher inflationary pressures as a result. This is likely to put further pressure on Japanese bonds and the yen.

Japan is one of the world’s largest creditors due to long periods of low interest rates. The country’s borrowings relative to its wealth (debt to GDP) are over 200%, more than double that of the UK.  Higher inflation could push holders in Japanese bonds to demand higher yields to compensate for the additional inflationary risks associated with a large stimulus package as well as more government borrowing. 

If the yen weakens, some traders fear that the Bank of Japan (BoJ) will be forced to intervene and support the currency by selling US Treasuries. This has sparked speculation about joint US-Japanese intervention to support the yen. If the BoJ were to sell some of its US Treasury holdings, this could push US bond prices lower and US bond yields higher. So far, this intervention has not occurred.

More time to pay IHT?

A House of Lords committee has urged the government to extend the deadline for paying inheritance tax (IHT) on pension assets and on estates with qualifying agricultural and business property.

The Economic Affairs Committee is recommending an extension of the current deadline of six months to one year, giving grieving families more time to deal with the significant complexities involved in paying tax on these assets.

Examples of such complexities include situations where an individual had multiple unused pensions which could be time consuming to locate, as well as the increased reliance on professional advisers to deal with these assets which would add further costs and risks for executors.

This recommendation comes as pensions face a significant change in their tax treatment. From April 2027, most unused funds and death benefits will count as part of a deceased’s estate and therefore fall within the scope of IHT.

For farmers and business owners, valuations may need to cover assets such as shops and rental businesses, creating further complexity. The increased need for specialist valuations is likely to raise costs and add to delays.

Late IHT payments are subject to interest charges at the Bank of England’s base rate plus four percentage points. Currently, this would equate to 7.75%.

IHT tip: make records

• Poor or missing records could lead to a higher tax bill. HMRC allows certain regular gifts to fall outside IHT, but only if they are regular, made from surplus income and do not reduce your standard of living.

Keep a clear record of any gifts and store it safely so your executors can easily verify what was gifted. You can also use form IHT403 to log gifts and transfers made during your lifetime. This will be completed after your death.

Retiring elements of the lifetime ISA

The retirement element of the lifetime ISA (LISA) looks set to be scrapped.

The government is preparing a replacement LISA solely for first-time buyers, with the 25% bonus paid at the point of property purchase, according to reports.

The new bonus structure would also remove the exit fees – a 25% withdrawal penalty under current rules – which apply when the tool is used for purposes other than buying a first home or retiring at 60.

Under existing LISA rules, individuals can contribute up to £4,000 each tax year, receiving a 25% bonus from the government, up to £1,000 annually.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Please note that Lifetime ISAs are not available through St. James's Place.