Fixed Income
Bonds markets have continued to hit the headlines over the past fortnight with European bond yields rising sharply. The yield on the 10 year German benchmark bond rose at one point to 1% which is a doubling of yield in under two weeks. This represents extremely unusual volatility and losses for investors with bond prices, of course, moving inversely to yields. This significant fall in European bond prices has wiped out all gains made in the bond bull market run since the beginning of 2015. This reversal in market direction has surprised many investors with the latter believing that the European Central Bank’s (ECB’s) quantitative easing program (QE)* would support prices for the foreseeable future with nearly all investors owning or taking ‘long’ positions in the market with this now proving costly. When all investors have the same view the ‘herd instinct’ mentality often ends badly. Another reason for the sell-off has been the improving picture in economic activity and expectations of higher inflation in the single currency zone.
*The fall in bond prices is despite the ECB’s QE programme whereby approximately EUR 1.1 Trillion of sovereign debt is due to be purchased (about EUR 60 Billion per month) in the open market by the central bank by September 2016.
Equities
With strong US economic data in the form of May employment numbers (US non-farm payroll) being released it is believed that a September US rate increase is almost inevitable. This long awaited increase represents, to many, the gradual reversal of the US / global low interest rate regime of the past, post financial crisis, several years. Higher interest rates are not good for economic growth and company profits accordingly so global equity markets have fallen in the last two weeks in response to this. The weakness and volatility of the bond markets has also unsettled equity investors and markets.
Falls in the major US and UK equity markets have been quire controlled but Emerging Market equity markets have fallen more sharply as the prospect of cheap / low interest rate dollar funding evaporates. Again, like the bond market, there is something of a ‘herd mentality’ with investors, having made good gains earlier in the year, now rushing for the door. Investors are withdrawing money from Emerging Markets at the fastest rate since the global financial crisis began.
Foreign Exchange
The main theme of the last two weeks has been the US dollar re-establishing its upward trend after a bout of weakness with the prospect of a September US rate rise. Higher interest rates in any particular country means a stronger currency relative to others of course!
Miscellaneous
-Greece: Fears that Greece could leave the Eurozone continued to mount with Athens needing to reach a deal before the end of June to avoid running out of money and defaulting on payments due to the IMF.
-US: M&A activity hits a monthly record as companies make the most of low borrowing costs ahead of potential US rate rises.
-Japan: The economy continues to perform ahead of expectations with first quarter growth revised up to 3.9%.
-HSBC announces job cuts of 25,000 with 8,000 jobs to go from the UK.
-Tobacco companies ordered to pay USD12.5 Billion to Canadian smokers.
EQUITIES
S&P 500: 2093
Nasdaq: 5052
BONDS – 10 Year Government Yields
US 2.40%
EU 0.90%
GB 2.00%
FOREIGN EXCHANGE
USD/EUR 1.1260 (1 euro buys 1.1260 dollars)
GBP/USD 1.5500 (1 pound buys 1.5500 dollars)
COMMODITIES
OIL: Brent: 64.50 (dollars per barrel)
GOLD: 1183 (dollars per ounce)
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Regards
Paul McCormick
