Equities
After the tremendous volatility of Q1 that saw equity and commodity markets plummet in January and February only for prices to recover sharply, most equity markets, unusually, have been calm over the last fortnight with prices broadly unchanged.
Japan stands out as an exception with Nikkei 225 falling about 7% over the last two weeks as the Japanese Yen hit an 18 month high versus the US Dollar hurting Japanese exporters. Japan has adopted a loose and accommodative monetary policy over the last few years in an attempt to devalue the currency and so stimulate the economy. This policy has not really worked and the Yen’s 5% appreciation over the last fortnight will not help matters.
European equity markets, although recovering significantly from February lows, have been weaker than the US market particularly, as the Eurozone has similar problems to Japan.The euro has been strong this year versus the dollar, economic growth remains anemic and there are questions over the success of Quantitative Easing. QE began in Europe in March 2015 and the European Central Bank is currently buying EUR 80 Billion of bonds per month as a way of monetary stimulus.
Although equity markets are broadly stable and close to 2016 starting values (particularly in the US) there are more dramatic stories behind this. The banking sector was down 7.5% over the last fortnight making a fall of 25% for this year. Banks are faced with a host of challenges:
- Making profits in a low interest rate environment (it is difficult to charge clients high interest rates when rates are generally zero in Europe)
- Dealing with the costs and implementation challenges of significant regulation (MiFID 2 and Basle 3)
- Making profits in January’s and February’s exceptionally difficult and volatile markets
- Weak global economic growth (so less business activity and demand for loans etc..)
It is generally perceived that US banks have evolved and adapted themselves better than their European counterparts:Credit Suisse, Barclays and Deutsche Bank are all struggling in Europe, indeed Deutsche Bank shares are down 40% for the year so far.
Other equity news must include the US Government blocking ‘tax inversion’ deals where normally a large US company takes over a smaller overseas company but the US parent changes its tax domicile to overseas and pays much less tax in the process. Pfizer, the US pharmaceutical giant, has had its plans to take over Dublin based Allergan scuppered by the US Government’s move. Allergan shares fell nearly 20% on the news. There have been USD 376 Billion worth of deals scuppered so far in 2016 in this manner.
Interest Rates / Currencies
Minutes from the FOMC (Federal Open Markets Committee), the rate setting council in the US, showed that the Fed expects a slower pace of interest rate increases than previously thought. The US Dollar is at a five month low as US interest rate expectations have eased.
As the likelihood of global interest rate rises becomes a distant prospect government bond yields have continued to fall (so prices up!).The German 10 year cost of borrowing is almost zero at 0.08%. US 10 year Treasury (Government) yields are higher than Europe at 1.7% but this is still down from 2% a couple of weeks ago.
The British Pound has had a very weak first quarter on ‘Brexit’ fears with ‘In/Out’ polls showing a very even contest. UK markets (in all asset classes) will have to face this uncertainty until the June referendum passes.
Commodities/Oil
One of the key moves over the last few weeks has been crude oil. There have been several days when it has looked like the recovery in price was faltering. These declines have been short lived and the price of Brent crude hit a recent high last week, finishing well above the important USD 40 per barrel. Part of the reason oil has continued to rally (from its recent low USD 27 per barrel) can be attributed to the positive rhetoric from the oil producing countries around a production freeze: They meet later this month. If this meeting ends with no production limit agreement the oil price will react for sure. Another reason for the sharp price rebound is that many Hedge Funds had ‘shorted’ oil expected further falls in price. Such institutions have had to scramble and cover their ‘short’ positions (by buying oil) so forcing the price up even further.
Equities
S&P 500: 2020
Nasdaq: 4880
FTSE 100: 6200
Bonds – 10 Year Government Yields
US 1.70%
EU 0.08%
GB 1.40%
Foreign Exchange
EUR/USD 1.1400 (1 euro buys 1.1400 dollars)
GBP/USD 1.4200 (1 pound buys 1.4200 dollars)
Commodities
OIL: Brent: 42.00 (dollars per barrel)
GOLD: 1250 (dollars per ounce)
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Paul McCormick
