Many global equity markets are once again close to all time highs and bond markets at all time low yields on the back of:
Quantatitive Easing
Over the last two week European markets have been supported by the European Central Bank’s decision to start a programme of QE taking the form of the ECB buying EUR 60 Billion of bonds per month effectively stimulating the European monetary system by this amount. QE was expected and the ECB did not disappoint. The EUR 1.1 Trillion package was at the high end of expectations with additional supportive comments that QE could continue as an open-ended policy. European stock markets welcomed this news and are up 6% since the announcement. A more accommodative monetary policy means more cash to chase financial assets and a weaker Euro which will help European companies be globally competitive via exports and consequently increase profitability. Bond yields fell further anticipating the ECB future purchases with German 10 year debt now yielding 0.30 %, its lowest ever level and below 10 year Japanese Government Bonds for the first time ever. European interest rate rises seem a distant prospect with the Eurozone now fighting deflation.
Greek Election
The anti-austerity party Syriza won the Greek election on January 25th with a promiss of re-negotiating the country’s bail-out package. Investors feared this could lead to Greece leaving the Eurozone but European equity markets have generally shrugged off the Greek election result as they perceive other financially challenged Eurozone members, Spain, Portugal, Italy are nothing like as economically vulnerable as 18 months ago and the risk of contagion is much less than it was. Indeed 10 year bond yields in these countries remain below 2 % indicating ‘financial calm’ as opposed to yields of over 10% in Greece. Furthermore European equity markets have since breathed a sigh of relief after proposals from the Greek finance minister turned out to be more modest than feared. The prospect of some sort of debt swap with bonds linked to economic growth has soothed fears that the Greek Government is intent on provoking a confrontation with its European partners with a view to exiting the Euro.
US Interest Rates
The message from the first meeting of the year from the US Federal Reserve was that they will continue to be patient over any interest rate rise. US and global equity markets welcomed this news as rising interest rates are not good for equities. With the US the fastest growing economy in the developed world at 5% annual GDP growth, the fear is of rising US rates this year. Janet Yellen, chairman of the Federal Reserve, said that the US was seeing solid growth but that rates would not rise for at least another two meetings, taking us through to April. However a strong US Dollar (making life difficult for US exporters), low inflation and weakness in the Eurozone dragging on global growth has meant that some commentators predict we will not see an increase in US rates in 2015. Again good news for equity markets.
Oil & Russia
Oil remains around USD 50 per barrel after its fall from USD 115 per barrel last summer. Russia continues to be a background concern for the markets since two thirds of Russia’s export revenue come from oil and gas. The Russian Rouble has collapsed to 70 Roubles to a dollar from 30 a few months ago. The Russian authorities have raised short term interest rates to 15% to protect the Rouble but this level of interest rates is crippling the economy. This story has yet to finish.
EQUITIES
S&P 500: 2020
Nasdaq: 4676
BONDS – 10 Year Government Yields
US 1.70%
EU 0.33%
GB 1.42%
FOREIGN EXCHANGE
USD/EUR 1.1380 (1 euro buys 1.1380 dollars)
USD/GBP 1.5050 (1 pound buys 1.5050 dollars)
COMMODITIES
OIL: Brent: 53 (dollars per barrel)
GOLD: 1257 (dollars per ounce)
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