Interest Rates
US: The big question remains “When will rates start to rise in the US?” heralding the start of an interest rate tightening environment which is usually bad news for bonds and equity markets alike.
This question was at least partially answered at the March 18th Federal Open Market Committee meeting (FOMC is the monetary policy making body of the US Federal Reserve System) when Janet Yellen, Chairman, removed the word’ patient’ from the language used at the rate setting meeting, allowing the central bank to move interest rates. However, she did say, that just because they had removed the word ‘patient’ it did not mean they were about to act and raise rates. The markets took her comments as making a June hike unlikely, with most forecasters now looking to September at the earlist for this. The Fed is clearly trying to engineer a smooth transition to higher rates. Overall the financial markets took this as positive or ‘dovish’ so bonds rallied and the US Dollar fell as higher rates do not look imminent.(Currencies strengthen on higher rates as investors can earn a higher return relative to other currency investments).
UK: Like the US rate rise, expectations have been lowered as inflation as measured by the CPI (Consumer Price Index) fell back to zero in February; its lowest level since records began in the late 80’s. Cheaper energy prices (see below) and food are the main reasons for the fall. Some commentators have even started to call for a cut in the UK Base Rate from 0.5% although this remains highly unlikely. Again higher rates are coming in the UK but perhaps for not a considerable period of time.
Foreign Exchange
The US Dollar has been very strong over the past few months as Quantatitive Easing (QE) ended and employment data remained strong. Dovish FOMC comments from Janet Yellon however caused the dollar to fall sharply moving from at one stage this month USD 1.05 to the Euro to 1.09. Investors have made good money owning or being ‘long’ the US Dollar this year so there was also an element of profiting taking in the move to USD 1:09 versus the Euro.
Fixed Income
Over the last few weeks US Treasury Bonds have been sold as investors anticipated higher US Rates (clearly bad for bonds as higher rates make current bond yields less attractive) but this rise in yields (and therefore fall in prices) has been reversed slightly as higher US rates do not look imminent so US 10 year bond yields have fallen back to below 2%.
Equities
Equities generally have seen profit taking over the last 10 days or so with tension in the Middle East, especially Yemen, causing some nervousness (see How Does International Conflict Affect Markets) and encouraging investors to take profits and move out of the market.
Commodities
Oil: Tension in the Middle East (clearly a major oil supply region) causes oil prices to spike up as has the escalation of civil war hostilities in Yemen with other countries countries in the region getting embroiled in the conflict. The price of oil rallied approximately 10% on the escalation of violence but has since sold off again as the world is awash with oil as US oil production soars as US drillers increase production at the highest rate in over 100 years.US output increased by 1.2 million barrels per day (bpd) last year to reach 8.7 million bpd.
American oil production has surged against a backdrop of volatile markets since the Organisation of Petroleum Exporting Countries (OPEC) effectively began a price war in November by agreeing to leave output quotas unchanged. Oil prices have fallen more than 50 pc since last June and are currently trading around $50 per barrel, spurred by global oversupply and weak demand. The development of shale oil resources in the US and widespread fracking have transformed the country’s industry and given the White House the option to potentially lift a historical ban on exports.
EQUITIES
S&P 500: 2080
Nasdaq: 4952
BONDS – 10 Year Government Yields
US 1.96%
EU 0.23%
GB 1.60%
FOREIGN EXCHANGE
USD/EUR 1.0780 (1 euro buys 1.0780 dollars)
GBP/USD 1.4800 (1 pound buys 1.4800 dollars)
COMMODITIES
OIL: Brent: 53.80 (dollars per barrel)
GOLD: 1180 (dollars per ounce)
Receive fortnightly Market Update notifications by ‘Following’ Opening City Doors on LinkedIn
https://www.linkedin.com/company/opening-city-doors
Regards
Paul McCormick
