EQUITIES
Global equities are in bull market mode right now supported by
– a world awash with funds due to Quantitative Easing by all of US, UK, Europe and Japan
– an extremely low interest rate environment
– good growth in US and UK and prospects of future growth in Europe
– low investment return opportunities elsewhere i.e. bonds
– stock markets boosted by renewed M&A activity*
-China (Hong Kong and Shanghai markets ) have led the way up incredibly 10% over the last two weeks
-UK (FTSE) is up 5% over the same period
– Japan (Nikkei) also up around 5%
– US (S&P 500) lagging behind at + 2% (over 30 US companies report first quarter earnings this week which will have a market impact!)
*M&A
There have been a number of deals in the last month or so headlined by the huge deal between Shell and BG; the biggest ever deal between two British companies, with Shell paying a 50% premium on BG shares (so forcing the FTSE index higher). Shell taking advantage of BG’s 30% fall in share price this year. The deal will increase Shell’s oil and gas reserves by 25% and production by 20%. Unusually this deal is being concluded incredibly quickly highlighting the ‘buy in’ of all parties to the transaction. Still plenty of fees for IBs!
FIXED INCOME
European Government bond yields continue to fall with the benchmark German 10 year BUND yielding just 0.15%. There are bets across some trading floors on when this yield is going negative and thereby effectively charging investors to lend money. Pre financial crisis German 10 year Govt (BUND) yields of 4 to 5% were more common. Switzerland has become the first country in history to issue bonds with a negative yield.* Incredibly 25% of all government / sovereign bonds now have negative yields – this is unprecedented (nothing remotely like it has happened in my 20 year bond trading career). The Portuguese 6 month government treasury bill rate is approaching zero. It wasn’t that long ago that Portugal was unable to access public markets and dependent on the bailout funds to keep the lights on. Amazing. Ireland, which also effectively collapsed after the financial crisis and again could not borrow money in the open markets, now has 10-year government bonds trading with a 70 basis point (0.70 per cent) yield. Again amazing!
*Why buy a bond with a negative yield?
With QE a truly global phenomenon there is simply too much cash trying to find a home.
If you are a Asset Management Bond Fund that has a official investment mandate only to buy high quality Government Bonds you are forced to buy German Bunds and similar assets with such low yields…you don’t have the investment authority to buy Corporate Bonds or shares.
If you have more investment flexibility, as an investor would you rather lend your money to Germany and guarantee to get your money back or would you rather lend to the Greek Government offering you 6%…clearly investors prefer German , French, UK and US Government Bonds.
FX
GBP: Although the FTSE equity index is ignoring UK election worries (caught up by global equity positive sentiment) Sterling has not. The pound has sunk to a five year low versus the US Dollar at 1.4600 (last summer it was 1.7300 dollars to a pound).
USD: The US Dollar in its own right has been strong against all currencies with the US perceived to be the first country to start raising interest rates, perhaps in Autumn. Higher interest rates means higher returns means investors buy the asset / sell other assets i.e. Buy USD ..sell GBP, EUR etc… The USD is close to its high at 1.06 to the Euro.
COMMODITIES
OIL: There is too much supply in the world right now
-US oil reserves held in storage are at record levels as the US fracking industry adds to supply
-Libya looks to restart production post civil war disruption
-Saudi Arabia is also producing at record levels at over 10 millions barrels per day
-Even Iran looks like to come in from the political wilderness (due to nuclear program appeasement) and increase production
In light of all this oil has done well to stay in the USD 55-60 per barrel range still however a long way off the USD 110 per barrel 10 months ago.
GOLD: Gold has been very unexciting for a number of months in the USD 1100-1200 per ounce range well below highs of USD 1900 a couple of years ago.
The asset is supported by the huge amount of paper cash in the world with gold being a 5000 year historic investment and a ‘store of wealth’. If the world was in more turmoil either economically or threatened with international conflict the gold price would be higher.
MISC
-Greece remains troublesome but no worse than it was. It repaid its EUR 450 Million IMF loan last week but needs to unlock EUR 7.2 Billion in bail-out funds from the ECB over the next couple of months. The Greek Prime Minister met Russia’s Putin which was certainly political game making in an attempt to scare EU authorities and help the Greek negotiating position.
-US had weak non-farm payroll statistics released on Good Friday which the markets chose to ignore. This number is the most important economic release in the world (released on the first Friday of every month). Why so important? ‘Non- farm’ means excluding the farming industry so essentially the whole US economy excluding farming which has very seasonal hiring patterns. ‘Payroll’ means the number of people who got jobs last month. With the US being the world’s largest economy you can see the significance for world markets. Indeed the saying ‘ when the US sneezes the rest of the worlds catches a cold’ comes to mind. So all markets are very sensitive to this number.
EQUITIES
S&P 500: 2095
Nasdaq: 4990
BONDS – 10 Year Government Yields
US 1.92%
EU 0.15%
GB 1.55%
FOREIGN EXCHANGE
USD/EUR 1.0560 (1 euro buys 1.0560 dollars)
GBP/USD 1.4600 (1 pound buys 1.4600 dollars)
COMMODITIES
OIL: Brent: 59.00 (dollars per barrel)
GOLD: 1190 (dollars per ounce)
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Regards
Paul McCormick
