Equities
Equity markets have rallied strongly over the past couple of weeks recovering sharply from the bank credit concern inspired sell-off of a couple of weeks ago and supported by a rebound in commodity prices. The UK FTSE, for example, moving from 5,500 to 6,050, now only 2% down for the year. The US is down 4% and German DAX still 11%.The latter not helped by the likes of Deutsche Bank down 30% on the year on such bank concerns. There is still concern on, particularly European, banks’ business models and their ability to generate profits in a regulatory driven, slow economic growth environment.
In China we continue to see the stock markets under pressure – especially banks, with the overall market still down 20% for the year.
However, generally the commodity price rebound has supported equities as the correlation between oil, other commodities and equities has been very close for a number of months.
Oil
400 oil rigs now operate in the US – that’s 25% of peak level (in 2014), the lowest since 2009. On the one hand this is what Saudi Arabia wanted when it decided to flood the oil market with supply i.e. force the price down to force out higher cost US producers (who are perceived to have production costs around $50 per barrel). However hefty global supply from the likes of Russia and Iran, with little real sign of a cut in world oil production, despite tentative Saudi Arabian and Russia agreement to do so, is generally keeping the oil price suppressed. However in the last couple of weeks oil has rallied about 5% as hopes of some production limit agreement has been enough to scare ‘short-sellers’ to go into the market and make purchases to cover positions.
Interest Rates
US: In spite of extremely low market-based inflation expectations we could see a further interest rate hike via the Federal Reserve; unlikely to be at the March FOMC meeting but we may get a surprise hike later in the year as some core inflation measures begin to rise i.e. low oil prices creates and an artificial perception of the true inflation picture. The US still looks like being the only developed nation to raise interest rates this year with Australia, New Zealand and Canada the latest nations looking to cut. This should underpin US Dollar strength this year.
EU: Eurozone’s inflation expectations are at a record low. Economic confidence remains weak with one of the concerns being the banking system’s exposure to energy businesses. Fiscal austerity in Europe is well and truly over. The ECB could well be prepared for more stimulus.
UK: The UK Base rate of 0.5% is unlikely to be raised until well into 2017 given the fragile global economic environment and zero UK inflationary pressures.
Fixed Income
European government bond market yields continue to head lower in anticipation of further ECB stimulus action with major European Govt. bond markets up to 5 years maturity offering negative yields/rates of return. Why buy an instrument with a negative rate of return? In a volatile world where commodities and equities have fallen, at times, 5 -10% on a single day this year, investors are more and more seeking capital preservation not capital appreciation and don’t mind a small negative rate of return when buying high quality bonds to achieve this. Note: Corporate bonds in these markets offer positive yields and are therefore more popular with private investors.
Foreign Exchange
US:Another US Dollar rally will be likely be the result of further rate hikes, posing significant risks to the (export) economy.
UK: Worries over ‘Brexit’ persist as the pound drifts lower falling against the dollar from $1.43 to $1.38 last week. This is a seven year low versus the dollar. Good for UK exporters, bad for companies that have to buy materials, good or services from overseas. Markets hate uncertainty and this is what they will be faced with up until the June 23rd referendum.
Miscellaneous
The rally in equities has not, as yet, led to a sell off in the price of gold which has held steady at USD 1240, still up 15% this year.
Emerging Markets continue to struggle with the South African Rand, the Ukrainian currency, the Argentine Peso (to name a few) all under pressure faced with economic and political turmoil.
Investment funds saw the largest outflows since the financial crisis as retail investors pulled £463m from investment vehicles in January in the UK. Less funds means less fund management fees means less asset management profit. Aberdeen Asset Management, the Emerging Market specialist is a good example of this, witnessing huge fund outflows.
Equities
S&P 500: 1950
Nasdaq: 4600
FTSE 100: 6050
Bonds – 10 Year Government Yields
US 1.74%
EU 0.10%
GB 1.35%
Foreign Exchange
EUR/USD 1.0900 (1 euro buys 1.0900 dollars)
GBP/USD 1.3900 (1 pound buys 1.3900 dollars)
Commodities
OIL: Brent: 36.00 (dollars per barrel)
GOLD: 1240 (dollars per ounce)
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Paul McCormick
