United States
The US markets remain focused on the timing of the first post recession interest rate rise. Last week the FOMC (Federal Open Market Committee – the US rate setting committee) issued its policy statement and economic forecasts, lowing its projection for 2015 growth to between 1.8% and 2%, down from as much as 2.7% expansion previously predicted. This downgrade had been expected. The Fed’s rhetoric implied that there would be two 25 basis point (0.25%) interest rate rises this year, probably starting in September with rate rises very gradual after that.
The Fed has the difficult task of keeping the markets in touch with their views without creating unnecessary adverse market reaction. So far it is achieving this. Markets in the US remained calm and, in fact, equity markets rallied on the statement. With US markets less concerned about the situation in Greece (see below) the US S&P 500 index is within striking distance of its all time high.
United Kingdom
Economic data is coming in on the stronger side at the moment as witnessed by strong Retail Sales data in May. Similar to the US this is focussing attention on the first (for several years) rise in UK interest rates. The consensus view is that the Bank of England will move on interest rates in the first quarter of 2016 i.e. one quarter after a US rate rise. The stronger economic data pushed sterling to almost GBP/USD 1.60, its highest level since November 2014.
Europe
All focus remains on the situation in Greece. Equity markets rebounded strongly on Monday 22nd June after Greece made a new offer on a reform package to its creditors. The new proposal was met with cautious optimism. Also on Monday the ECB (European Central Bank) held an emergency meeting to discuss the Greek banking system; last week over EUR 4 Billion was withdrawn from accounts in the country.Greece is due to repay a EUR 1.5 Billion loan to the IMF by 30th June.
Although the markets are nervous over the prospect of a Greek default the situation is not as perilous as the previous Greek crisis as
- The European economy has started to improve so contagion to other Eurozone countries is less likely.
- European companies, especially banks, had a very large exposure to Greece last time; this is not the case now.
- The ECB started its QE program at the beginning of the year so fostering overall Eurozone monetary and economic stability.
All these factors have reassured investors that a ‘Grexit’ is containable.
Asia
Focus remains on China where equity markets continue their massive rally leading many commentators in the West to call it a ‘stock market bubble’ and fear the consequences. The Shanghai stock market has risen over 150% in the last year. The technology heavy mid-cap index, ChiNext, has risen 300% in the same period! Such performances has led to a huge rise in the number of new hedge funds, private equity and venture capital companies. Although the markets have risen strongly, last week was very bad, the market fell 13%, its worst weekly performance since 2008.This will be an interesting story to follow.
EQUITIES
S&P 500: 2120
Nasdaq: 5160
BONDS – 10 Year Government Yields
US 2.38%
EU 0.90%
GB 2.10%
FOREIGN EXCHANGE
USD/EUR 1.1300 (1 euro buys 1.1300 dollars)
GBP/USD 1.5900 (1 pound buys 1.5900 dollars)
COMMODITIES
OIL: Brent: 64.00 (dollars per barrel)
GOLD: 1183 (dollars per ounce)
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Regards
Paul McCormick
