Equities
Last week global equity markets fell with a ferocity similar to the 2008 financial crisis.There was no clear single catalyst but rather an accumulation of factors:
- Continued fears over the slowdown in the Chinese economy.
- Very weak Emerging Market performance (economy, currency, equity markets) as such countries are the producers of the world’s commodities with the ‘end commodity buyer’ China out of the market.
- Sluggish European growth with the European Central Bank’s (ECB) Quantitative Easing programme having limited effect.
- Moves by Central Banks (ECB, Sweden Japan) to offer negative interest rates for any banks who deposit funds with them.
- Fears over the financial well-being of European banks in particular (see below).
- Generally a low, perhaps worsening, global growth outlook including a slowing in the US economy which had led world growth in 2015!
Fixed Income
Investors sought the safety of high quality Fixed Income assets with the 10 year Germany Government bonds yielding 0.15% at one point last week and the US at 1.74% and the UK at 1.4%. Many European Government bond markets with maturities less than 5 years offer negative yields i.e. a negative rate of return. Such bonds are bought for ‘capital preservation’ rather than ‘capital appreciation’.
Interest Rates
- Janet Yellon, Chairman of the US Federal Reserve, suggested last week she was in no hurry to raise borrowing costs.
- A UK rate rise also now looks like a 2017 event rather than 2016.
- A European rate rise looks a very distant prospect given fragile growth and no inflation on the continent.
Foreign Exchange
Again there are three main themes:
- The US dollar has weakened after a strong 2015 as the outlook for 2016 US interest rate rises has similarly weakened.
- The Japanese Yen strengthened significantly last week as investors regard it as a ‘safe haven’ play, like bonds and gold, as Japan and the Yen are far removed from the troubles of US, Europe , Emerging Markets etc…
- The UK Pound is vulnerable to further weakening on the back of leaving the EU / ‘Brexit’ fears.
Banks
Concern over the health of banks, particularly European banks, was the new additional worry last week.
Big banks are battling to regain investor confidence with many suffering double-digit share price falls amid doubts on their ability to weather weakening growth and ultra-low interest rates. Banks have been laid low through a combination of fears on falling oil prices, slowing growth, market turbulence in China and the fading power of central banks to support markets. The global bank sector has fallen about a fifth of its value since the start of the year, Deutsche Bank was down 40% for the year-to-date at one stage.
Deutsche Bank, Credit Suisse and Barclays, to mention a few, are struggling to make money with their business models of the last few years trying to be ‘all things to all people’ failing. Additionally, large fines and the increasing cost of regulation e.g. Basle 3 and MiFID 2, means that they are now restructuring to focus on core business often involving an increased focus on asset management. (This often involves ‘lay-offs’ and ‘hiring freezes’ but fortunately graduate hiring programmes roll on!).
Over the last few days European lenders rallied across the board after Deutsche Bank led the fight-back, announcing that its “strong liquidity position” would allow it to buy back about $5.4 billion of bonds.Banks say they are in better shape now but investors need brighter economic news before confidence returns.
Equities
S&P 500: 1865
Nasdaq: 4350
FTSE 100: 5800
Bonds – 10 Year Government Yields
US 1.74%
EU 0.23%
GB 1.43%
Foreign Exchange
EUR/USD 1.1100 (1 euro buys 1.1100 dollars)
GBP/USD 1.4400 (1 pound buys 1.4400 dollars)
Commodities
OIL: Brent: 33.00 (dollars per barrel)
GOLD: 1200 (dollars per ounce)
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Paul McCormick
