Global Economy
UK: Weak Q1 GDP likely linked to ‘Brexit’ uncertainty with the UK going to the polls on June 23rd.
The Bank of England meets on Thursday to unveil its latest interest decision. Uncertainty over the looming EU referendum in June is clearly affecting economic performance, as was clear last week from a ream of poor activity data for April. Financial markets and investors hate uncertainty and it is completely unclear how a Brexit would affect the UK’s fiscal, regulatory and trade positions. Indeed Mark Carney, Governor of the BOE, has already labelled the referendum the “biggest domestic threat” to UK financial stability. Indeed in a Brexit scenario a cut in UK interest rates is a possible. Six months ago the market was betting how far and how fast UK interest rates would rise.
China: Additional to UK growth fears, China’s growth continues to slow sharply with data last week showing the Chinese manufacturing sector contracted in April for a 14th successive month.
US: Furthermore, growth in the world’s largest economy, America, grew at its slowest pace for two years in the first quarter leading commentators to expect only 1 more 0.25% interest rise later this year (down from expectations of 4 such rises at the beginning of the year). So there are concerns over global growth right now. Ironically, the Eurozone grew faster than any other big developed economy in the first three months of the year. After eight years, the economy of the single-currency bloc has finally returned to its pre-crisis peak mainly as a result of the huge and ongoing ECB stimulus package and cheap oil.
Equities
As a result of the slower growth scenario above, April’s strong rally in equity markets has come to a grinding halt. Indeed, equity markets have retreated between 2% and 5% over the past fortnight but generally remain calm, if subdued, and far removed from the crisis and falls of January and February.
Foreign Exchange
US: The recent fall in the US dollar (down approximately 5% year-to-date) is because of generally weaker US economic data implying that interest rates in the country will rise at a much slower pace than previously thought.
EUR: Dollar weakness this year has seen the Euro strengthen from around 1.06 to 1.14. A strong Euro, so hurting European exporters, is the last thing that Mario Draghi and the European Central Bank want.
Fixed Income
Core government bond yields rose in April, however, recent slow growth news (and therefore little chance of interest rate rises) have seen yields fall back towards the lows with US 10 year debt moving from 1.9% to 1.75% and UK gilts from 1.65% to 1.4%
With bond yields, and therefore the cost of borrowing, so low in Europe European bond markets expect a bumper week of bond new issues as blue-chip borrowers move to lock in low interest rates.
Oil
The price of oil has performed better recently than other economic growth influenced commodities partly as a result of supply concerns as Canadian oil production has taken a huge hit due to the devastating wildfire in Alberta so affecting Canadian pipeline supplies.
Other oil news :
- Oil output of Iran and Iraq is at the highest level in 40 years.
- Saudi Arabia has recently announced plans to modernise the Saudi economy and decrease its reliance on oil revenue.
- Oil discoveries sink to a 60-year low as hard pressed oil groups conserve cash and finding oil is not as profitable as it was!.
Equities
S&P 500: 2050
Nasdaq: 4750
FTSE 100: 6100
Bonds – 10 Year Government Yields
US 1.75%
EU 0.15%
GB 1.40%
Foreign Exchange
EUR/USD 1.1400 (1 euro buys 1.1400 dollars)
GBP/USD 1.4400 (1 pound buys 1.4400 dollars)
Commodities
OIL: Brent: 45.00 (dollars per barrel)
GOLD: 1265 (dollars per ounce)
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Paul McCormick
