INTEREST RATES
Markets continue to expect the US FOMC (Federal Open Market Committee) to begin raising interest rates in June and will be looking for further clues as to rate rise timings from the wording of the today’s FOMC meeting. Strong US job data continues to support this belief. Non-farm payrolls data* for February showed that the US economy continues to grow strongly. Last month 295,000 new non-farm jobs were created taking the jobless rate to a six and a half year low at just 5.5%.The rate of unemployment is one of the key measures the FOMC uses when making rate decisions.The long term post war average in the US is 5.83%
*Farm jobs are taken out of the measure due to the seasonal hiring nature of the farming industry.
EQUITIES
European and US stock market performance has diverged so far this year as the European Central Bank (ECB) starts Quantitative Easing (bullish for stock markets as ‘money printing’ meaning more money is available for asset purchases ) whilst the US is looking at higher 2015 interest rates (bearish for stock markets as higher rates are punitive for consumers and businesses alike). This year the S&P 500 is broadly unchanged whereas major European markets are up between 10 and 20% (excluding the UK which is up just 3%). The S&P underperformance is partly due to its recent strong run, doubling since 2010, the end of QE in the US and the strength of the US Dollar with the latter forcing up the price of US exports overseas. Worth noting that the first quarter of 2015 has seen record inflows into European equities as the ECB starts QE.
FOREIGN EXCHANGE
The US dollar continues to strengthen on international currency markets as expectations of rate rises spur further buying of the currency. Additionally QE in Europe and Japan is effectively devaluing the currencies in those regions. The Euro did stabilise briefly around 1.13 level to the USD but has since continued its downward spiral, inching close to parity, trading at just 1.06. In 2011 the rate was 1.50. Many analysts believe that the ECB’s QE program will continue to put pressure on the single currency, possibly forcing it below parity (1:1) to the US Dollar.
BONDS
Another consequence of of ECB QE is the continued strength of the European bond markets. The ECB started buying sovereign/government bonds last week, forcing yields down to record lows, pushing the differential between US and European debt to extended levels. One year ago the difference was 100 basis points (1%) now that differential is 185 basis points, with Germany paying just 0.25% for 10 year debt, a record low. With such a strong demand for developed country sovereign debt about 16% of such yields are negative. Negative yields effectively mean that investors pay countries to borrow. They do so because they have funds that need a ‘safe haven’ home.
A further consequence of this is Governments and Corporates are issuing large amounts of long dated bonds taking advantage of the unprecedented low borrowing costs available to them. In the first 3 months of this year there have been record amounts of bonds issued with a maturity of 30 years or more. US companies are also taking advantage of this; borrowing in Euro and swapping the proceeds back into USD – this is what Investment Bankers do!
EQUITIES
S&P 500: 2075
Nasdaq: 5055
BONDS – 10 Year Government Yields
US 2.05%
EU 0.30%
GB 1.68%
FOREIGN EXCHANGE
USD/EUR 1.0620 (1 euro buys 1.0620 dollars)
USD/GBP 1.4820 (1 pound buys 1.4820 dollars)
COMMODITIES
OIL: Brent: 53.20 (dollars per barrel)
GOLD: 1158 (dollars per ounce)
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