World Markets at a Glance
In this week’s issue
- Global equity markets react nervously to events unfolding in Greece and China.
- Greece fails to pay back the €1.5 billion loan due to the IMF on the 30th
- Out flows from bond funds gain momentum as investors worry about a possible Grexit.
- The US unemployment rate falls to its lowest level in more than seven years.
- It’s becoming less likely that the Fed will tighten this year as external pressures increase.
- As the Greeks vote “No” and Grexit becomes more likely will contagion be an issue.
What does this mean for private clients, markets and asset classes?
“Global investors show signs of nervousness as the Greek dilemma unfolds”
Last Week’s events
Whilst most global equity markets fell last week, as negotiations between Greece and its creditors collapsed, the correction could have been much worse. Indeed, with Athens effectively defaulting on its €1.5 billion loan from the IMF, pressure began to mount over a possible Grexit, which in turn, left the other members of the European Union awaiting the outcome of Sunday’s Greek referendum.
Clearly, with the European Central Bank stating that it would not extend emergency funding to the Greek banks, growing risks mounted as to Greece’s future participation in the European Union and the euro. This in turn, led to an initial closing of the Greek banks before they reopened with a cash withdrawal restriction firmly in place. This meant that daily cash withdrawal limits were set at €60 per day effectively seeing the country impose capital controls.
This was followed by the Greek government calling for a referendum to be held on the Sunday 05th July which was subsequently seen by the creditors as not very helpful, and suggesting that Prime Minister Alexi Tsipras was just using the referendum as some form of delaying tactics. Admittedly, the Greek people appeared to be viewing this action as a “vote on austerity” not a “vote to remain in the euro”, however, regardless of the outcome of the referendum the fact still remains that Greece owes a huge amount of money to its creditors with the likelihood that they will never repay it back.
Obviously, the uncertainties over the past few weeks, has led to many investors withdrawing their money from global government bond funds. Indeed, the market saw the largest outflows ever last week as investors withdrew US$2.85 billion amidst mounting fears that the Greeks would inevitably exit the eurozone. And in terms of the past four weeks some US$6.1 billion of government bond fund outflows has been recorded which is the largest outflow since the taper tantrum in July 2013.
Likewise, it will be of no surprise that in Europe outflows from eurozone fixed income has been rather excessive with around US$3.3 billion exiting this asset class over the last couple of months. Equally, interest in European corporate bonds has dried up over recent times with new issuance reflecting this to some degree. Similarly, record outflows from high-yield bonds and money market funds have also mounted as doubts over Europe and fears of Grexit gain momentum.
On Wall Street the market was down just over 1.0 per cent by the week as fears surrounding the outlook for Greece and further uncertainties about the US economy gripped investor sentiment leading them to reduce risk within their portfolios. However, in terms of the US economic data, it was reported last month that a further 223,000 jobs were added which brought the unemployment rate down to 5.3 per cent, nonetheless, there still seems to be very little sign of any wage inflation which will worry the Fed and Janet Yellen.
Unquestionably, the recent US jobs report, and additional US economic data is likely to heighten the debate amongst Federal officials about the possible timing for monetary tightening. Indeed, Janet Yellen and the other members of the FOMC have stated that a healthy pace of jobs growth would be one of the reasons for tightening this year, given that a stronger labor market could lead to faster inflation; conversely, the current absence of any real wage inflation and the Greek dilemma seems to be scuppering any chance of an interest rate hike this year. Indeed, it is becoming more unlikely that the Fed or the Bank of England will tighten before 2016.
Never-the-less, it is still anticipated that the Federal Reserve Bank will be the first of the central banks to tighten given that the US economy is leading the global recovering and is well in advance of other regions such as the UK, Europe or China. Admittedly, the headwinds from higher interest rates and the likelihood of a stronger US dollar will take its toll on the US market and its investors, equally, if we were to see US companies benefit from the recovery, and corporate profits surprise on the upside, then it is likely that the US stock market will remain quite resilient, especially, if we see a meaningful rotation out of US bond markets and into US equities.
Likewise, other regions that still look compelling are Japan where we should still see a pick up in corporate profits growth, whilst valuations remain cheap. Undoubtedly, Greece is a threat given that any uncertainty surrounding Europe is likely to see global investors rush back into currencies such as the yen and Swiss franc; however, the Bank of Japan, should remain accommodative whilst the shift of pension fund asset allocations out of bonds and into equities should be supportive for the market.
The Nikkei 225 Index
Equally, the ECB’s monthly quantitative easing programme should still remain positive for European equities over the longer term, unfortunately, over short-term the picture does looks less appealing, given the uncertainties surrounding Greece and the probability of them existing the European Union and the euro, however, the ECB president, Mario Draghi, has promised to do whatever it takes to generate a much stronger European economy, which in turn, should lead to better prosperity for the region, an increase in employment levels, and a rise in corporate profits.
The FTSE World Europe ex UK Index
Elsewhere, we have seen the emerging markets suffer, seemly due to the recent sell-off in Chinese equities, worries about the Feds imminent change of fiscal policy, and uncertainties surrounding the effects of a Grexit. Clearly, the slowdown in the Chinese economy is a concern, likewise is the higher capital costs once interest rates begin to rise, and of course the possible trade impact within Central and Eastern Europe if Greece were to leave the euro.
Clearly, we find ourselves in unchartered waters and therefore it is quite understandable that this cocktail of unhelpful events has spooked emerging market investors, which in turn, has led to the MSCI Emerging Market Index retreating by just over 10 per cent since mid-April.
“The Greeks vote ‘No’ in referendum whilst their Finance Minister resigns”
Once again the events on Sunday surprised the markets as the Greek people unanimously voted ‘no’ to the eurozone’s terms for the country to remain in the single currency. Equally, it must be said that the Greek no vote was deemed to be against further austerity rather than a vote to leave the euro.
Certainly, in his speech to Greek voters, Prime Minister, Alexis Tsipras, said that the voters had not given him a mandate against Europe, but a mandate for a sustainable future. He also warned that there would be no easy solutions. With the Greek banks now closed, capital controls in place, and the country now rapidly running out of money, the importance to find a resolve over the next few days is of paramount importance.
Finally, with the increased likelihood that Greece might exit the European Monetary Union the question concerning future contagion could once again feature highly on the minds of investors especially if you think about the possibility of political contagion within the ballot boxes of Spain as the Spanish electorate votes in their General Election on the 20th December 2015
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum he worked within larger asset managers, primarily as an Investment Director within Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Investment Committee. This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.