The Lowdown on Markets to 21st November
World Markets at a Glance
In this week’s issue
- Another good week for global equity markets as investors accept a Fed rate hike is coming.
- The ECB president makes some forceful remarks regarding the prospects for additional QE.
- The Japanese economy falls back into recession suggesting that further QE will be needed.
- Central banks move closer to decoupling whilst investors begin to readjust their portfolios.
- There are three key dates and decisions in December that will define the markets direction.
- The biggest risk to global markets in 2016 continues to be deflation.
What does this mean for the markets and asset classes?
“Global equity markets rally on prospects about central bank action”
Has the “Santa Claus Rally” come early this year? Certainly last week’s global equity market rally presented investors with an impression that it had. The S&P 500, FTSE 100, and Eurofirst 300 Indices were all up by over 3.0 per cent over the trading week, with the Nikkei 225 rallying by just over 1.4 per cent. This positive sentiment swing gave the market a clear indication that investors were feeling fairly relaxed about the prospects of the US Federal Reserve Bank raising interest rates next month.
Indeed, the Fed fund futures have already priced in a 70 per cent chance of a US interest rate hike next month, but of course, there is still a chance that the central bank will stall and leave their first rate hike in a decade until the New Year when they can determine from yet another month of data whether the US economy has suffered any further from those events happening outside of the US.
“Black Friday has become the biggest shopping day of the year for the biggest economy in the world”
Admittedly, the Fed might have a clearer indication on how the US consumer is feeling, given that over the next few days we have Thanksgiving, Black Friday and Cyber Monday, all of which will see the US consumer show their worth in terms of spending prior to the festive season. In 2014 around US$50.9 billion was spent during the four day week-end period, but down by 11.0 per cent from the previous year. Without doubt, Black Friday has become the biggest shopping day of the year for the biggest economy in the world; equally, over recent years it has become a global affair with so many countries now experiencing a similar event.
Clearly, the divergence of monetary policy around the world is just a few months away which are likely to alter investor thinking for 2016 and beyond. Certainly, the Fed will be the first central bank to begin monetary tightening, followed by the UK, however, there is likely to be at least a six month time lag between the two. Then of course, in Europe and Japan, both central banks are expected to increase their quantitative easing programmes in the not too distant future, indeed, ECB president, Mario Draghi made some forceful remarks last week about the prospects of additional QE to try and raise the Eurozone’s inflation rate. By the same token, with the Japanese economy falling back into recession it cannot be too long before the Governor of the BoJ, Haruhiko Kuroda, takes similar action
“With the US dollar likely to strengthen further once the Fed announce their intentions and begin raising rates”
Understandably, talk of monetary policy divergence is having an effect on other asset classes; with the US dollar likely to strengthen further once the Fed announce their intentions and begin raising rates. Likewise, we are likely to see US Treasury yields begin to back up whilst industrial commodity prices feel the further effects from a strengthening dollar. Similarly, we might see the price of gold weaken further under the headwind of a firmer dollar and higher short-term bond yields.
However, what was interesting about last week’s equity market moves was that investors seem to be embracing the Fed’s forthcoming decision given that we are only likely to see a marginal increase and then it might be sometime before they raise rates again. Also there would seem to be a sizeable number of investors on the side-lines waiting for some clarity by the Fed, this in turn, could lead to some investors buying back into the markets on any sign of weakness. Given that scenario equities should do well over the next year or so. That is not to say that we will not experience some volatile periods over that time period, as global investors begin to address their asset allocations towards a changing investment environment.
Arguably, macro events will continue to dictate the daily direction of markets, indeed, issues such as the slowdown within the Chinese economy, the approaching Fed fund tightening programme, the additional monetary stimulus needed in the eurozone and Japan, and the ongoing geo-political risks will continue to intensify market conditions and the direction for all asset classes. However, what this will create is some good investment opportunities in 2016 within geographical regions, sectors, and of course, most importantly stocks.
“We expect that marginal higher interest rates in the US should bode well for US sectors”
Therefore, we expect that marginal higher interest rates in the US should bode well for US sectors such as financials, healthcare and technology, whilst any additional monetary loosening in Europe and Japan is likely to promote further weakening in the euro and yen, which in turn, should benefit many of those European and Japanese exporters. Similarly, cheaper commodity and oil prices should benefit many of those importing countries such as the European Union, China, India, South Korea and Japan.
Regrettably, we may still see some further weakness in the emerging markets and Asia and possibly commodity prices if the US dollar were to strengthen more that is expected, however, we are now getting to those levels whereby pockets of value are now appearing, and of course, many of these countries will still continue to deliver some of the best GDP figures in the world. Therefore, we might see many of these markets, and indeed, commodity prices rebound over the coming months and years.
“There are still three key dates that could dictate how markets behave into the year end and more importantly 2016″
And so, as we move ever nearer to the final month of 2015, there are still three key dates that could dictate how markets behave into the year end and more importantly 2016. Firstly, there is the ECB meeting which will be held on the 03rd December 2015, and the market fully expects ECB president, Mario Draghi to further ease monetary policy, secondly, there is the monthly US employment report on the 04th December 2015, and thirdly, the US Federal Reserve Bank meeting on the 16th December 2015, which will decide whether US interest rates will rise for the first time in a decade, or whether the FOMC decide to wait until 2016.
Therefore to conclude this week’s Lowdown, we fully expect both the Fed and ECB to deliver what the market is expecting, however, there is also potential for disappointment, if either of the central banks of Europe or the US were to frustrate the markets by doing nothing it might create issues as it would appear that much of what is expected to happen in December is already being reflected in the markets. Therefore, let’s hope Santa Claus continues to help the markets rally for the remainder of 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 a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed.
Investment Quorum is authorised and regulated by the Financial Conduct Authority .