EQUITIES
Equities globally experienced a sell-off early in 2015 due the collapse in the price of crude oil* to just over US$ 50 per barrel, falling over 50% since last summer and 10% so far in 2015. Lower oil prices are normally seen as positive for the global economy, as lower petrol prices increases consumer spending power, but the size and magnitude of the fall has scared investors. Oil has fallen principally on over-supply fears but the latter implies slow global growth i.e. bad news for equity markets. US shale gas production is also not helping the oil supply situation. The UK FTSE fell 2.5% last year partly because of it’s exposure to companies in the natural resource and gas markets. Indeed over 25% of the FTSE is made up of companies exposed to these sectors. BP & Shell are down over 5% so far this year.
Another factor to negatively affect European equity markets in particular is troubles in Greece with Prime Minister Samaras failing to secure enough votes to avoid calling a general election. A snap election now takes place on 25th January with the opposition party ahead in the polls. The latter is known for its anti-austerity policy and anti-Eurozone sentiment i.e. if elected Greece could exit the Eurozone.
Fears that Germany is becoming the latest European economy to fall foul of deflationary forces has raised the prospect of a fresh round of monetary stimulus to stave off a fall into negative prices (negative inflation) in the Eurozone. The eurozone’s largest economy recorded its lowest rise in consumer prices in over five years as inflation rose by just over 0.1 pc in December.
All of the above is weighing heavily on equity markets and supporting bond markets as interest rate rises look some way off.
BONDS – 10 Year Government Yields %
- US 1.97
- Ger 0.46
- Jap 0.30
- GB 1.60
Others:
Greece 9.70%: Up from 5.7% last summer on Eurozone exit fears.
Spain 1.63%: Interestingly not affected by Greece troubles unlike last summer when Spain’s own Eurozone exit fears meant yields of 8%. Spain in better economic shape currently.
Russia 14.00%: Interest rates have been dramatically raised to protect the Rouble which has halved in value to 60 Roubles to a dollar as the oil price and Russian oil revenue tumbles.
FOREIGN EXCHANGE
In anticipation of QE the Euro has traded lower (therefore the US Dollar is higher) hitting a 9 year low against the USD breaking the 1.19 area.
The US Dollar is also generally supported against other currencies as the US is going to be the first global economy to raise interest rates with a current annual growth rate of 5%.
- USD/EUR 1.1854 (1 euro buys 1.1854 dollars)
- USD/GBP 1.5135 (1 pound buys 1.5135 dollars)
COMMODITIES
OIL : Brent US$ 52 per barrel.
GOLD : US$ 1,213 per ounce (supported by equity market nervousness especially concerning Greek political situation.Gold is regarded as a ‘safe haven’ investment as it has been around for 5000 years!)
OIL*
- Brent crude; the benchmark made of oil from 15 North Sea fields against which almost half the world’s petroleum is priced.
- West Texas Intermediate (WTI) another major benchmark for the US oil market.
QE (Quantatitive Easing)
An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
How large would a QE package by the ECB (European Central Bank) be? Between Euro 500 Billion and 1 Trillion is the consensus.
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