The recovery in the prices of global risk assets has continued over the last fortnight as a result of a recovery in commodity prices and further European Central Bank monetary easing.
Interest Rates
US: Economists anticipate the US Federal Reserve will leave benchmark interest rates unchanged when policymakers meet this week and indeed for next month also. However, they further believe the uncertain outlook for global growth will not stand in the way of the central bank resuming its path towards a rate rise in June. The view of traders and investors, as judged by the futures markets, implies just one interest rate rise this year.
Europe: The European Central Bank unleashed a bigger than expected package of measures to stimulate the eurozone economy, with expanded quantitative easing, incentives to banks to increase lendings and further interest rate cuts. The ECB cut is deposit rate last week by 10 basis points to minus 0.4 per cent, but eased the impact on banks with cheaper short-term loans and longer-term liquidity at negative interest rates – essentially, paying eurozone lenders to increase credit to households and companies. Mario Draghi, the ECB president, said interest rates would stay low for “ an extended period” and he kept open the option for a further cut.
Equities
Eurozone’s equity market recovery trails the US: The ECB monetary stimulus last week notably boosted banks and the region’s share markets. However, the broad Euro Stoxx 600 index remains 5.7 per cent lower for the year compared to the US S&P 500 which, as part of the global equity market recovery, is now only 1 per cent lower this year. Additional to ECB stimulus, equity markets have positively responded to the sharp rebound in global commodity prices, a significant lessening of fears around the creditworthiness of banks and the global focus moving away from China’s economic slowdown.
Half of eurozone company earnings come from overseas and with the single currency appreciating against the US Dollar this year, as investors have lowered expectations of US Federal Reserve interest rate rises, a weaker euro to boost company earnings is the missing ingredient for the region’s equity markets.
Fixed Income
Europe:Short maturity (up to 5 years) government debt from major eurozone countries remain securely in negative yield territory with the German 2 year Bund, for example, offering -0.45 yield as Europe is awash with money looking for a home and equity markets remain volatile. The benchmark 10 year German Bund yield is a meager 0.25%.
US:Yields are higher in the US reflecting a reasonably robust US economy and a Federal Reserve keen and relatively able to raise interest rates. Two year US Treasury bonds yield 0.90 per cent and 10 year bonds 1.97 per cent.
UK:The UK economy is in some ways in is in middle territory, not experiencing either the chronic economic weakness of Europe nor a robust enough economy to raise interest rates. Accordingly 2 year UK Government Bonds or ‘Gilts’ yield + 0.51 per cent and 10 year Gilts + 1.68 per cent.
Oil
Brent Oil, the international oil marker, at just below $40 per barrel, has rebounded almost 45 per cent from a 13-year low near $27 a barrel in January, helping to spur a wider rally in commodity markets. The recovery came as major producers started to work on a plan to freeze output and supply and remove more than 800,00 barrels a day of production from the market.
Opec’s biggest producer Saudi Arabia and Russia agreed last month to freeze oil output at January levels, but only if other large producers such as Iran and Iraq agreed to do the same.
Iran has said it would join discussions but only after its own output, which has been hit hard by western sanctions, reached 4m b/d. Iran pumped 3.22m b/d in February, in the first full month freed of nuclear sanctions.
Equities
S&P 500: 2020
Nasdaq: 4750
FTSE 100: 6175
Bonds – 10 Year Government Yields
US 1.68%
EU 0.25%
GB 1.68%
Foreign Exchange
EUR/USD 1.1100 (1 euro buys 1.1100 dollars)
GBP/USD 1.4300 (1 pound buys 1.4300 dollars)
Commodities
OIL: Brent: 39.00 (dollars per barrel)
GOLD: 1240 (dollars per ounce)
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Paul McCormick
