The Lowdown on Markets to 29th January 2016
World Markets at a Glance
In this week’s issue
- Central Banks inspire markets creating a rally and increasing risk appetite amongst investors.
- The US market records its worst start to a New Year ever with similar results elsewhere.
- In Japan the Bank of Japan cuts interest rates on excess reserves to minus 0.1 per cent.
- In general economic growth expectations are being downgraded with the exception of Europe.
- As the Federal Reserve Bank try to tighten several outside forces begin to take their toll.
- Global equity markets are likely to remain volatile over the coming few months.
“Central banks step in again to steady market stress and nervous investors”
Whilst global stock markets closed out the month of January in a more positive mood it does not hide the fact that equity markets around the world saw trillions of dollars wiped off of their stock market valuations as renewed fears about the Chinese economic slowdown, and a further fall in the price of crude oil rekindled worries that eventually these, and other negative events, will have a nasty effect on global economic growth, eventually leading to a global recession.
Regrettably, the downturn in market sentiment since the turn of the year has meant that a number of the leading stock market indices around the world have now moved into “bear market territory”, with the US recording its worst start to a New Year since records began. This in turn, has then led to some speculation that January tends to be a longstanding gauge for what tends to happen for the rest of the year. Indeed, based upon historical facts, if the US market has a bad January then in nearly three-quarters of the time since 1929 the US tends to record a down year which doesn’t bode well for the remaining eleven months.
“If central banks grab the headlines by announcing intervention methods then markets turn positive very quickly”
Clearly, the “January blues” has been blamed upon China and oil, and of course, that is true, but the fact of the matter is that when central bankers are not nourishing the markets with talk of further stimulus, or taking action, then they over react to daily macro events, which currently tends to be negative. However, if central banks grab the headlines by announcing intervention methods, then markets turn positive very quickly.
This has been very apparent over the last couple of weeks, with the European Central Bank stating that they could increase their quantitative easing programme in March, followed by the Federal Reserve Bank announcing that they would keep borrowing costs unchanged, with a dovish tone to their statement. Then at the end of last week the Bank of Japan unexpectedly announced that they will be lowering their interest rate on excess reserves from 0.1 per cent to minus 0.1 per cent thus joining the elite group of the ECB, Swiss National Bank and the Swedish Riksbank among others that have adopted a negative interest rate policy.
“Inflation is stubbornly low and wage growth anaemic”
Understandably, in the case of Japan most market watchers were taken back by the BOJ’s actions, given that most were under the impression that the BOJ would announce additional quantitative easing, however, by pushing interest rates into negative territory they have implemented a period of charging banks for parking excess funds. Although the markets took this action positively, whilst the yen weakened off against the dollar, it might mean that the BOJ are out of bullets. Indeed, inflation is stubbornly low and wage growth anaemic, and so the authorities do need to be mindful over the coming months.
In terms of the capital markets a similar situation persists with government bond yields across both Europe and now after last week’s BOJ actions in Japan, falling below zero. Indeed, we are now in a position whereby a quarter of bond yields in the JP Morgan government bond index are negative.
“Investors have been spooked this year by uncertainties in the equity markets”
Quite clearly, investors have been spooked this year by uncertainties in the equity markets therefore risk assets have been shunned in favour of non-risk assets. This has meant that investment inflows into government bonds have intensified, depressing yields, and putting further pressure on those investors that are seeking income with a low risk appetite.
Likewise, this incredible period of central bank intervention has also led to a “race to the bottom” for many leading global currencies. Certainly, each time we see interest rates cut, or quantitative easing implemented, the FX markets retaliate, which in turn, has had an overwhelming effect on selected currencies over the past few years.
“How many more years will it be before they will be able to normalise interest rates”
Certainly, with global economic growth figures for 2016 already looking as if they might come in similar to 2015, or even worse, the continual interventions by the central banks seem only to be inflating asset classes whilst depressing government bond yields. Sadly after seven years of zero interest rates, and an absolute fortune being spent on monetary policy strategies, we are still facing numerous dangers including a possible recession. Admittedly, unforeseen forces have not helped, such as the collapse in commodity prices, an unwanted stronger US dollar, and frequent geo-political upheavals, but after such a long period of central bank involvement, questions are being continually asked, how many more years will it be before they will be able to normalise interest rates.
“There is some value appearing in some markets, sector and at the stock level, making this a fairly good investment environment for professional stock pickers”
Arguably, over the short-term global equity markets are likely to remain volatile and unpredictable given that global economic data is likely to endure some further disappointments over the coming months whilst the central banks around the world remain committed to support their domestic and global economy in the event of any deterioration.
Clearly, this makes investing quite difficult as the corrections and recoveries happen very quickly and the daily percentage moves fairly large, add to that soft earnings growth, and an increase in dividend cuts in sectors such as miners, oils and retailers makes this problematic. Conversely, there is some value appearing in some markets, sector and at the stock level, making this a fairly good investment environment for professional stock pickers.
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 .