Generally investors in Europe are bullish on equities because of both the Euro 1.1 Trillion Quantitative Easing (QE) announced by the European Central Bank (ECB) in January and the belief that lower oil prices will stimulate the global economy (as consumers are better off as a result of lower petrol prices ) however the situation in Ukraine and the protracted Greek debt negotiations are holding back significant equity investment.
GREECE
What’s become known as the Greece-Eurozone game of chicken continues with talks between Eurozone finance ministers and the new Greek government over the re-financing of the Greek bailout, due in a couple of weeks, ended at least for now with Athens rejecting the bailout extension. However equity markets have taken this news in their stride with most believing that some sort of deal will be achieved given the magnitude of the situation. Greece leaving the Eurozone comes with significant potential damage for the Greek economy and indeed for the financial well-being of the European Central Bank if Greece defaults and the event would general question the sustainability of the Eurozone concept.
UKRAINE & RUSSIA
A tentative ceasefire has been agreed and this together with the IMF agreeing a USD 17.5 Billion reform program for Ukraine last week has been positive for global markets.
The Russian stock market and the Ruble reacted positively to the ceasefire however the currency is still down nearly 50% in the last 12 months as the oil price has similarly halved. Russia is very dependent on oil and gas exports so its financial markets also benefited in the bounce in the price of oil last week.
OIL
Brent Crude has rallied from a recent low of USD 50 a barrel to trade now at USD 60 due to
– capital expenditure cuts by the major oil companies and so limiting future supply
– the US dollar has weakened a little from recent highs*
– speculators who have been selling oil ( ‘going short’) have closed out their trading positions by making purchases
*As oil is priced in USD ‘all other things being equal’ and to maintain a constant worth of a barrel of oil, as the dollar weakens the price of oil must rise and vice versa. Same principle with the price of gold also priced in USD.
US
American equity markets remain well supported and close to all time highs on the back of being the fastest growing developed economy in the world with 5% GDP growth also supported by low oil prices. The question remains on when the US begins to raise interest rates and it is expected to be the first major global economy to do so. The US has had rates at near zero for 6 years. Some fear that if the Federal reserve does not take action soon that the moves will have to be more aggressive when they do happen.
OTHER
Sweden’s Riksbank is the latest central bank to stimulate its economy, cutting interest rates to -0.1% and announced QE of USD 1.2 Billion.
The Danish Central Bank has attempted to defend its currency peg with the Euro by cutting interest rates to -0.75%. Since the huge QE by the ECB the Euro has fallen heavily putting upward pressure on the Danish Krone. This is the same scenario as the Swiss Franc where the Swiss Central Bank was forced to abandon its peg leading, at one stage, to a 30% rise in the Swiss Franc against the Euro in one day ! It settled at a +15% after this turmoil.
EQUITIES
S&P 500: 2094
Nasdaq: 4893
BONDS – 10 Year Government Yields
US 2.05%
EU 0.35%
GB 1.71%
FOREIGN EXCHANGE
USD/EUR 1.1380 (1 euro buys 1.1380 dollars)
USD/GBP 1.5380 (1 pound buys 1.5380 dollars)
COMMODITIES
OIL: Brent: 61 (dollars per barrel)
GOLD: 1283 (dollars per ounce)
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