Markets are going round Cape Horn

What will happen now that QE is starting to taper?

Having had good passage through the warm gulf stream waters of "quantitative easing" ("QE" to you and me) flowing strongly from the shores of the US and latterly Japan, markets have now reached what, in market confidence terms, may be regarded the investor’s equivalent to the nautical experience of going round Cape Horn. We are passing into the rough seas where the conflicting currents of one ocean system, meet those of another. That is to say - translated into impenetrable dry as dust market speak – where the expected "tapering by the US authorities of Quantitative Easing" meets US economies recovery, putting hitherto bullish equity market sentiment to the test. Will the equity bull market of recent times be wrecked by the withdrawal of cheap money? Can you have a continuing bull market fueled by near no cost credit when interest rates start to rise?

We knew that we had moved into these choppy seas this week when the yield on US 10 Year Treasury bonds went through the previous 2 per cent "resistance level" to close at 2.23 per cent. The ship’s timbers may have creaked a little but the SS Equity Markets sailed on the next day, blown by news of the gathering pace of US economic recovery in housing, employment and consumer confidence, only to be blown off course the following day by the shore winds of analysts’ concerns, as they publicly pondered what it meant? Suddenly, the thing that markets hate most - uncertainty - had arrived.

My own view is that equity markets needed what I call a "linear regression down swing" in prices to remain faithful to its longer term trend. In short markets look a bit overbought in a year  when investors decided it was unwise to "sell and go away in May" because they did not want to be out of the market, and short of stock, when something as big and important as the continued stirrings of the long awaited US economic recovery were being witnessed. Consequently, the market was flooded with bearish conjectures as investment banks’ scrambled to take profits on bull positions and at the same time, get back some stock for their market makers, who must have been "short" after a long bull run that continued un-seasonally into May.

I retain my early, long running bullishness of equities, because the US Federal Reserve will tread carefully in managing a return to normalizing its interest rate. I reasonably conclude that it will tailor sales of the bonds it acquired, to fit the balance sheets of non banking providers of finance and credit with enough leg room with the right kind of bond collateral at the right yields, to facilitate the working of short term cash markets. Generally, most big companies balance sheets are in good shape to withstand higher interest rates. As Franklin Roosevelt once reassuringly said, the only thing to fear is fear itself.

Ben Bernanke. Photograph: Getty Images

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Want to send a positive Brexit message to Europe? Back Arsene Wenger for England manager

Boris Johnson could make a gesture of goodwill. 

It is hard not to feel some sympathy for Sam Allardyce, who coveted the England job for so many years, before losing it after playing just a single match. Yet Allardyce has only himself to blame and the Football Association were right to move quickly to end his tenure.

There are many candidates for the job. The experience of Alan Pardew and the potential of Eddie Howe make them strong contenders. The FA's reported interest in Ralf Rangner sent most of us scurrying to Google to find out who the little known Leipzig manager is. But the standout contender is Arsenal's French boss Arsene Wenger, 

Would England fans accept a foreign manager? The experience of Sven Goran-Eriksson suggests so, especially when the results are good. Nobody complained about having a Swede in charge the night that England won 5-1 in Munich, though Sven's sides never won the glittering prizes, the Swede proving perhaps too rigidly English in his commitment to the 4-4-2 formation.

Fabio Capello's brief stint was less successful. He never seemed happy in the English game, preferring to give interviews in Italian. That perhaps contributed to his abrupt departure, falling out with his FA bosses after he seemed unable to understand why allegations of racial abuse by the England captain had to be taken seriously by the governing body.

Arsene Wenger could not be more different. Almost unknown when he arrived to "Arsene Who?" headlines two decades ago, he became as much part of North London folklore as all-time great Arsenal and Spurs bosses, Herbert Chapman or Bill Nicholson, his own Invicibles once dominating the premier league without losing a game all season. There has been more frustration since the move from Highbury to the Emirates, but Wenger's track record means he ranks among the greatest managers of the last hundred years - and he could surely do a job for England.

Arsene is a European Anglophile. While the media debate whether or not the FA Cup has lost its place in our hearts, Wenger has no doubt that its magic still matters, which may be why his Arsenal sides have kept on winning it so often. Wenger manages a multinational team but England's football traditions have certainly got under his skin. The Arsenal boss has changed his mind about emulating the continental innovation of a winter break. "I would cry if you changed that", he has said, citing his love of Boxing Day football as part of the popular tradition of English football.

Obviously, the FA must make this decision on football grounds. It is an important one to get right. Fifty years of hurt still haven't stopped us dreaming, but losing to Iceland this summer while watching Wales march to the semi-finals certainly tested any lingering optimism. Wenger was as gutted as anybody. "This is my second country. I was absolutely on my knees when we lost to Iceland. I couldn't believe it" he said.

The man to turn things around must clearly be chosen on merit. But I wonder if our new Foreign Secretary Boris Johnson - albeit more of a rugger man himself - might be tempted to quietly  suggest in the corridors of footballing power that the appointment could play an unlikely role in helping to get the mood music in place which would help to secure the best Brexit deal for Britain, and for Europe too.

Johnson does have one serious bit of unfinished business from the referendum campaign: to persuade his new boss Theresa May that the commitments made to European nationals in Britain must be honoured in full.  The government should speed up its response and put that guarantee in place. 

Nor should that commitment to 3m of our neighbours and friends be made grudgingly.

So Boris should also come out and back Arsene for the England job, as a very good symbolic way to show that we will continue to celebrate the Europeans here who contribute so much to our society.

British negotiators will be watching the twists and turns of the battle for the Elysee Palace, to see whether Alain Juppe, Nicolas Sarkozy end up as President. It is a reminder that other countries face domestic pressures over the negotiations to come too. So the political negotiations will be tough - but we should make sure our social and cultural relations with Europe remain warm.

More than half of Britons voted to leave the political structures of the European Union in June. Most voters on both sides of the referendum had little love of the Brussels institutions, or indeed any understanding of what they do.

But how can we ensure that our European neighbours and friends understand and hear that this was no rejection of them - and that so many of the ways that we engage with our fellow Europeans rom family ties to foreign holidays, the European contributions to making our society that bit better - the baguettes and cappuccinos, cultural links and sporting heroes remain as much loved as ever.

We will see that this weekend when nobody in the golf clubs will be asking who voted Remain and who voted Leave as we cheer on our European team - seven Brits playing in the twelve-strong side, alongside their Spanish, Belgian, German, Irish and Swedish team-mates.

And now another important opportunity to get that message across suddenly presents itself.

Wenger for England. What better post-Brexit commitment to a new Entente Cordiale could we possibly make?

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.