It has been a dramatic couple of weeks in the bond markets – equities, FX and commodities relatively calm.
Fixed Income
The European Central Bank’s (ECB) Quantitative Easing (QE) programme has seen the ECB been a huge buyer of European Government and Sovereign bonds over the last few months buying EUR 60 Billion per month with a background of anemic European economic growth and inflation roughly at zero per cent. This led to an unprecedented collapse in European sovereign bond yields with the cost of the benchmark German 10 year bond falling to a record low yield of 0.05%. Everything has changed over the past fortnight with very significant bond weakness across Europe (yields up and prices down).The yield on the 10 year German Government Bond (BUND) went from 0.05% to 0.72 % .This may not sound much but is a huge move in market terms with significant volatility and losses for investors / Fund Managers (note:some IBs would have profited from the price collapse by talking short positions and generally would have welcomed the volatility)
The extreme bond market move was due to
- Most market participants had taken a bullish view on the market and were predicting even lower yields. When the market is all ‘one way’ like this it normally means trouble as everyone rushes for the (bond market) exit all at once.
- Inflation looked non existent in Europe a couple of months ago but since then oil has rallied from USD 45 per barrel to USD 68. Higher oil prices is an upward inflationary pressure. Higher inflation means potentially higher interest rates and therefore higher bond yields. Don’t get me wrong, inflation and interest rates are not going to rise anytime soon in Europe however this upward spike in the oil price was likely one of the catalysts for starting the price rout in the bond markets.
Italian and Spanish 10 year bond yields moved from around 1.2% to 2.0%. The US Treasury market also sold off (remember markets are global!) but not as heavily as their European counterparts.US 10 Treasuries now yield over 2%.Coincidentally the main equity market in the US, the S&P 500, also yields 2%
Equities
US economic data has been on the weaker side recently leading some to question whether the US recovery is faltering. The consensus is that the economy is ‘not too hot, not too cold’ at the moment with US equity markets broadly unchanged over the past fortnight. The market is still looking for the first US rate rise in September.
In the UK the Conservative election win help stablise equities after a volatile two weeks with the FTSE 100 2.3% higher on the news moving once again above the 7,000 level. Worth noting that the FTSE is dominated by International energy and resource focussed companies and that the FTSE 250 (a better UK company and economic representation) was up nearly 3% on the news to an all time high.
Outside of the US and UK the Chinese Shanghai equity market continues to attract attention having more than doubled over the last 12 months against a background of poor economic fundamentals. Perhaps the next speculative bubble to pop!
Foreign Exchange
The US dollar, which has been very strong over the last 18 months, has recently underperformed on the back of weaker recent economic data.
Sterling moved up on the election news rising 1.5% versus the US Dollar and the Euro having underperformed against both recently due to election uncertainty. Markets hate uncertainty!
Miscellaneous
- Greece repayment negotiations continue on a knife-edge with multiple repayments due over the coming weeks and months. A default remains a possibility. 10 year Greek Government bonds yield 11%.
- The M&A sector remains robust with Monsanto making an USD 45 Billion offer for Syngenta; a Swiss crop and seed company.
- The large oil companies reported solid Q1 earnings despite lower crude prices.
- Hewlett-Packard sues the CEO and CFO of Autonomy for USD 5.1 Billion claiming accounting fraud associated with the 2012 takeover.
EQUITIES
S&P 500: 2105
Nasdaq: 4995
BONDS – 10 Year Government Yields
US 2.29%
EU 0.70%
GB 2.00%
FOREIGN EXCHANGE
USD/EUR 1.1200 (1 euro buys 1.1200 dollars)
GBP/USD 1.5500 (1 pound buys 1.5500 dollars)
COMMODITIES
OIL: Brent: 65.00 (dollars per barrel)
GOLD: 1190 (dollars per ounce)
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Regards
Paul McCormick
