Equity markets at all time highs and European Government bond yields at all time lows.
EUROPE
NEWS: The Greek crisis has been averted for now with the Greek government appeasing both its voters, who elected them on an anti-austerity manifesto,and also Brussels and the German parliament, with a six page proposal of economic reforms resulting in the Eurozone extending its rescue loans for another four months. Global investors were relieved that a Greek compromise has been reached and the country still has the backing of Europe’s largest economy i.e. Germany even though today’s solution is a temporary one.
EQUITIES: Markets hate uncertainty. Equities welcomed the Greek crisis resolution pushing beyond previously reached all-time highs with the UK FTSE a little slow to get there.The latter’s under-performance due to the high number of companies in the index that are involved in oil and gas, and secondarily, metals and mining, two of the worst performing sectors of recent months.
BONDS: Bond markets continue to perform well on the news, moving up in price and therefore down in yield, all on a bedrock of the ECB Quantitative Easing (QE) programme whereby the ECB will buy up to EUR 60 Billion of mostly government bonds starting this month and will continue these purchases to at least September 2016 i.e. a minimum EUR 1.1 Trillion total. The cost of borrowing German 10 year debt is just 0.3% and short-dated 2 year debt has a negative yield at -0.23%. Indeed over 18% of total Eurozone Government debt is in negative yield territory.*
A consequence of this unprecedented historic level of low European bond yields is that US companies have been attracted to raise capital (issue bonds) in Europe.In total this year US companies have raised USD 16.5 Billion so far.
*Why would any investor buy a bond with a negative yield i.e. an investment where you are guaranteed to get back less money than you put in?
On face value this might not seem attractive : It is a ‘safe haven’ investment. Your main concern is security of funds not rate if return. In today’s turbulent world where yields on economically challenged south Eurozone Government bonds yielding sub 2% the risk/reward does not appear overly attractive here. There is simply too much money trying to find a safe home currently as QE has become a global phenomenon.
US
Federal Reserve Chair, Janet Yellon, in her speech to the congressional committee signalled that the Fed may well drop he word ’patient’ from its rhetoric. If removed at the next meeting it would mean that rates could rise as early as June, however market expectations are for a move in September or October. Initially US Treasury yields rose, but that move was short lived; most analysts believe that whilst rates are likely to rise later in the year, they are unlikely to rise much or very quickly. US treasury yields are little changed over the last fortnight, US Equities gently pushing ahead along with other global equity markets.
MISC
- Oil continues to be well off the bottom and stabilising at USD 60 per barrel.
- China continues to cut interest rates to boost its flagging economy.
- Lloyds Bank restarts its first dividend payments since financial rescue.
- HSBC embroiled in a Swiss banking scandal
- Barclays profits down with its Investment Bank continuing to underperform.
- The UK election is only two months away with the lack of a clear party dominating not currently unsettling UK markets.
EQUITIES
S&P 500: 2117
Nasdaq: 5008
BONDS – 10 Year Government Yields
US 2.08%
EU 0.35%
GB 1.79%
FOREIGN EXCHANGE
USD/EUR 1.1180 (1 euro buys 1.1180 dollars)
USD/GBP 1.5380 (1 pound buys 1.5380 dollars)
COMMODITIES
OIL: Brent: 60.50 (dollars per barrel)
GOLD: 1208 (dollars per ounce)
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