Financial markets, having demanded a rate cut to fight a coronavirus-provoked economic downturn, didn’t know which way to turn when the US Federal Reserve obliged with a half-point reduction. Wall Street’s whoosh lasted an hour, and the next direction for stock markets is anybody’s guess.
Confusion is understandable at two levels. First, one could say it’s legitimate for the Fed to jump into emergency mode if it perceives “evolving risks to economic activity”. Cutting borrowing costs, even by small amounts, allows businesses and consumers to save a few dollars that can be used to weather disruption. If that’s the tactic, you might as well move early.
Yet the Fed gave the impression only last week that it would prefer to see some hard economic data before changing stance. What’s “evolved” so quickly? The US central bank risks giving the impression that it’s been spooked. Was it last week’s stock market falls, Donald Trump’s lobbying for a cut or behind-the-scenes intelligence about the spread of the virus? None of those possibilities convey confidence.
US Federal Reserve’s interest rate cut leaves markets in a dither | Nils Pratley
The second confusing aspect is that the Fed’s trigger-happy approach did not form part of a joined-up international effort. Indeed, the outcome of the earlier teleconference between G7 finance ministers and central bank chiefs was a ho-hum pledge to use “all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks”. In other words, it was a statement of intent, rather than one of action.
That being so, the Fed’s unilateral action came across merely as a nervy effort to throw something at financial markets to keep them quiet until the G7 cooks up a fighting fund or a “shock and awe” package of economic measures. Markets, unfortunately, are rarely patient. They also know that monetary measures are an ineffective tool for tackling a healthcare emergency.
One suspects investors will soon want to see more than a Fed cut – such as policies aimed at the crisis, rather than share prices.
Sirius burns out
One feels desperate sympathy for those small investors who have lost more than they can afford to lose by buying shares in Sirius Minerals, but the point needs to be made: what on Earth were they thinking?
A speculative project to mine for polyhalite, a nutrient-rich mineral, under the North York Moors is almost the definition of a high-risk investment. Have a small flutter if you wish but, for heaven’s sake, don’t punt large chunks of your savings on the basis of hope and a single company’s flimsy financing plans.
Sirius Minerals takeover at risk after investor rebellion
Look at the scale of what Sirius needed to fund. The project involves sinking two shafts to a depth of almost a mile and then building a 23-mile underground tunnel to a port on Teesside. And all that had to be completed before any cash from selling polyhalite would arrive. Early-stage shareholders had a chance of becoming fabulously rich if all went well, but the possibility of ending up with almost nothing was always real.
The latter outcome, sadly, came to pass. Sirius’ management, having spent most of 2019 scrambling for money, eventually surrendered to a lowball takeover from the mining giant Anglo American at 5.5p a share, a far cry from the 38p seen as recently as 2018.
Cue rounds of recrimination at Tuesday’s shareholder meeting to vote on the deal, which resulted in narrow approval. Come on, though, there’s no point damning Chris Fraser, the company’s chief executive, for the bad turn of events.
Yes, he probably gushed too wildly about Sirius’ prospects in the past – but that’s what chief executives do. And, yes, it suited Sirius to have a large band of local shareholders when it was seeking planning consents. But the financial risks around a startup mining project were always clear to outsiders, or should have been.
Nor is it any use blaming the government for failing to back a big northern infrastructure project. Fraser himself was guilty on that score at Tuesday’s meeting but, from the point of view of the public purse, the takeover by Anglo would be perfect.
One of the world’s biggest mining companies will commit to investing $3bn (£2.3bn) in a multi-year expansion near Whitby, creating a few thousand jobs and, one hopes in time, generating a few tens of million of pounds a year in tax for the Treasury. And it should all happen without public subsidy.
Now that clarity has finally emerged, the government should direct some serious investment towards financial education in the UK. Another Sirius-style punt will arrive soon enough. More scepticism is needed.
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