Equities
Global equity markets have rallied modestly over the past fortnight helped by a rebound in commodity prices including oil. The sectors that were hit hardest earlier in the year performed best with basic resources and banking up over 10%. The US S&P 500 index is very close to its all-time high. Europe and the UK also performed well but both are a long way off all-time highs with Europe still facing sluggish economic growth and the UK occupied with ‘Brexit’ fears.
Japanese equities have been particularly strong rising over 10% in two weeks as weakness in the Japanese Yen raised prospects for exporters. The Yen is weak as further Bank of Japan monetary easing, in the form of Quantitative Easing, is expected. Japan is part of the ‘country club’ that already has negative short-term interest rates.
Interest Rates
A subdued start to 2016 for the US economy, coupled with depressed inflation expectations, will likely prompt the US Federal Reserve to keep interest rates unchanged at the FOMC (Federal Open Markets Committee) meeting this week. Having pushed through the first rate increase in nearly a decade in December, the ‘Fed’ wants to tread carefully on when to raise rates again using an ultra-cautious approach to normalising monetary policy. Fed Funds are approximately 0.5% now but worth noting the average ‘Fed Funds’ rate since 1980 is close to 6%!
The ECB (European Central Bank) also left interest rates unchanged with Chairman, Mario Draghi, implying there would be no more rate cuts. The Euro appreciated strongly on this news. Draghi did also say that the stimulus unleashed in March was working.
Commodities
Oil: Hopes for agreement between OPEC and non OPEC members to freeze production, in response to the weak oil price, failed at last week’s meeting principally due to Iran wishing to see its own output return to pre-sanction levels before agreeing to any such accord. With the oil price very strong over the past month, rallying from $27 to $45 per barrel, some profit-taking was inevitable but prices remained broadly unchanged on the news. This demonstrates a completely different mentality in the market compared to earlier in the year when negative news a had a sharp impact on prices. The positive correlation between the oil price and equities continues.
Iron Ore: Prices have risen an astonishing 22% over the last fortnight helped by positive comments from Chinese officials around lower stockpiles.
Copper: Also up strongly at +8% helped by the general commodity rally and reasonably positive data around the Chinese economy.
Fixed Income
US 10 year yields have risen from 1.75% to 1.85% and UK Gilts have moved from 1.4% to nearly 1.6%.
Foreign Exchange
FX markets have been relatively quiet. The trends however are:
- EUR: Strengthening with no further interest rate cut prospects
- GBP: Recovering strength after a weak Q1 as ‘Brexit’ fears are lessening to a degree.
- YEN: Weak as further monetary stimulus expected.
- USD: Weak in Q1 as expectations have weakened over the pace of interest rate rises in 2016. The dollar was strong throughout 2015.
Misc.
- Saudi Arabia has confirmed plans to sell a 5 pc stake in the state-owned oil giant via an initial public offering valuing Saudi Aramco at $2 trillion.The company listing would be the largest in the world and would raise substantial funds for the stumbling Saudi economy which has come under serious pressure as the global oil price has crashed from around $100 a barrel in 2014 to 12-year lows under $30 earlier this year.
- Apple is set to report its first ever drop in iPhone sales and its first fall in revenue for more than a decade.
- The 88 year old UK retail chain BHS entered administration leaving a £571 million pension deficit.
- Generally Q1 US and European company earnings have so far been mixed although banks have beaten, albeit low, earnings expectations.
Equities
S&P 500: 2085
Nasdaq: 4890
FTSE 100: 6260
Bonds – 10 Year Government Yields
US 1.88%
EU 0.26%
GB 1.60%
Foreign Exchange
EUR/USD 1.1300 (1 euro buys 1.1300 dollars)
GBP/USD 1.4500 (1 pound buys 1.4200 dollars)
Commodities
OIL: Brent: 43.00 (dollars per barrel)
GOLD: 1250 (dollars per ounce)
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Paul McCormick
