Equities
The overall investment climate remains positive although major equity markets have treaded water over the last couple of weeks close to, but below, recent all time highs.
With European markets have risen strongly this year (many up 20-25%) it is no surprise for markets to pause for breath. The situation in Greece is also holding back global markets. In the US we have seen a lot of US companies recently report first quarter earnings which have broadly come in as expected although some well known companies have stated that the current strength of the dollar has had a negative impact on their overseas earnings. Interestingly US Banks have reported strong earnings helped by market volatility so far this year together with increased M&A fees.
The equity market that is catching most attention is the Chinese Shanghai stock market which has risen 100% in the last 12 months and is up approximately 35% so far this year. Although the Chinese market has lagged other world markets over the last few years this meteoric rise is not backed up by improved economic fundamentals (even though the Chinese have started their own version of QE) so the rise is hugely speculative and commentators fear a painful bursting of this bubble at some stage.
Fixed Income
Bond yields are broadly unchanged from record low levels (highest bond prices) over the last fortnight all supported by European QE and distant rate rise prospects (except US and UK although even here no rate rises are imminent). At the start of the year the German 10 year bond yield was 0.60% and is now 0.14%. Half of all German debt now has a negative yield. One interesting point is the fact that the ECB has stated, as part of its QE program, it will not buy any bonds with a negative yield of -0.2% which means that any German government bond (BUND) with a maturity of 3 years or less will not be eligible for the ECB’s bond buying program. Investors may be reluctant to buy bonds that are not ECB QE eligible. Again interestingly, such historically low government bond yields are coupled with a reasonably strong German economy which again is unprecedented. Strong economic growth normally means higher interest rates/bond yields.
Interest Rates
Expectations remain of gradual interest rates rises starting in the US in Q3 and in the UK in Q1 2016. Clearly no rate rise prospects are foreseen for Europe for some considerable time.
Oil
Brent reached a four month high of USD 65 per barrel compared to it recent USD 45 per barrel low of a couple of months ago supported by rising conflict in the Middle East particularly in Yemen.
With the Middle East being a major oil producing region fears over supply issues has driven prices higher. Additionally the number of US ‘fracking’ rigs in operation continues to fall as this industrial sector struggles to live with the current low oil price regime (fracking is more expensive than traditional oil extraction methods).
Misc
-M&A activity continues to pick up especially in the pharmaceutical sector. The total value of deals in this sector so far this year is nearly USD 100 Million up 70% on the same period the previous year.
-Deutsche Bank announced it would take a first quarter litigation charge of ‘approximately EUR 1.5 Billion’ as part of its LIBOR rate settlement .
-Tesco reported a GBP 6.4 billion loss; the biggest in UK retail history.
-A British futures trader (trading from his parent’s home in Hounslow!) was arrested in connection with the huge 2010 US equity ‘flash crash’.
-HSBC announced it is reviewing whether to continue having its global Head Office in the UK (due to ‘regulatory and structural’ pressures).
EQUITIES
S&P 500: 2030
Nasdaq: 5100
BONDS – 10 Year Government Yields
US 1.93%
EU 0.14%
GB 1.67%
FOREIGN EXCHANGE
USD/EUR 1.0850 (1 euro buys 1.0850 dollars)
GBP/USD 1.5200 (1 pound buys 1.5200 dollars)
COMMODITIES
OIL: Brent: 65.00 (dollars per barrel)
GOLD: 1190 (dollars per ounce)
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Regards
Paul McCormick
