The Lowdown on Markets to 26th February 2016
World Markets at a Glance
In this week’s issue
- Global equity markets rise for the second week on a more optimistic outlook.
- The crude oil price rises on supply disruptions affecting northern Iraq and Nigeria.
- Another important feature of the week was the meeting of G20 ministers in Shanghai.
- Talk of “Brexit” or “Bremain” has a negative effect on sterling whilst the dollar rallies.
- One of Wall Street’s leading economic barometers has been rising since January.
- Whilst investors should remain wary there are some interesting opportunities appearing.
“Stock markets rise for the second week in a row as growth fears ease”
Positive momentum in global stock markets continued to help risk assets rise throughout last week, as some more encouraging US economic data, a rise in the crude oil price, and easing concerns over global growth set the scene for a more optimistic outlook.
Resembling most recent weeks global equity markets have taken their lead from the price direction of crude oil, and with the price rallying up to US$37.0 a barrel on Friday, global equity markets took some encouragement and rallied likewise. Admittedly, some better US economic news also helped with the overall market sentiment.
“This turnaround of fortunes also saw the US dollar rally”
This turnaround of fortunes also saw the US dollar rally, whilst having a slightly more negative affect on US Treasuries and gold bullion. None-the-less this pull-back in the gold price does not deter the fact that it has recently reached a one-year high of US$1260.0 a troy ounce, as investors have used the yellow metal as a “safe haven” asset class in times of high volatility, and uncertainty in the equity markets.
Another important feature that investors kept an attentive eye on was any developments from the meeting of the G20 finance ministers in Shanghai. Indeed, with so much indecision regarding global central bank policy, and downward pressure on the stock markets, investors became mindful of every word spoken by each minister.
“Talk surrounding the uncertainties over “Brexit” or indeed “Bremain”, has already taken its toll on the foreign exchange markets”
Certainly high on their agenda, excluding the slowdown of the Chinese economy, was the question concerning how the people of the UK might vote in the forthcoming EU referendum on the 23rd June 2016. Clearly, talk surrounding the uncertainties over “Brexit” or indeed “Bremain”, has already taken its toll on the foreign exchange markets seeing sterling react negatively.
And in respect to that topic, the British pound has fallen to its lowest level since March 2009, before showing some slight improvement by the end of the week. Clearly, it will be a tricky time for sterling over the coming weeks, and obviously not helped by some institutions uttering that it could fall by an additional 20 per cent if the “no vote” were to gain further traction or become an eventuality.
“The value of sterling, and the UK stock market, could rapidly strengthen”
However on the other hand, the value of sterling, and the UK stock market, could rapidly strengthen, especially if the “Bremainers” [the yes voters] begin to win the battle.
By the same token, on a much wider remit it would be naive for any investor to expect any “grand plan” or “magic bullet” solution to repair either the current down turn in the global economy or the precarious start in global stock markets this year.
Unfortunately weak demand, volatility in foreign exchange, and falling stock markets have posed a nasty problem for the G20 members, and like in previous downturns, a coordinated strike through some form of stimulus package might be considered to avert further global economic weakness.
Understandably, the financial markets and its investors are looking for some new and refreshing monetary policy strategies from the heads of the leading global central banks, as both feel that the old methods have become out dated and non-effective, hence the recent rise in panic levels within the stock markets.
” We are now entering a period where we will see divergence between many of them with the likes of the US Federal Reserve Bank entering a period of monetary tightening”
Obviously, in recent times all of the central banks were attentively pulling in the same direction, but of course, we are now entering a period where we will see divergence between many of them with the likes of the US Federal Reserve Bank entering a period of monetary tightening, this clearly makes things much more difficult going forward.
Consequently, whatever the outcome of this G20 meeting, any monetary policies proposed by the members are likely to remain accommodative and supportive towards the current weakening global economy. Also other matters of contention that are likely to be included in any impending drafts will include issues such as geo-political upheavals given the shockwaves that they can deliver in terms of global economic disturbance.
“What has been fascinating is the recent steady rise in one of Wall Street’s leading economic barometers”
Now if we quickly return to today’s market, what has been fascinating is the recent steady rise in one of Wall Street’s leading economic barometers, the Dow Jones Transportation Average Index. This index includes many companies such as American Airlines, CSX, Fedex, Norfolk Southern and Union Pacific, and is therefore considered sensitive to the wider US economy and the Dow Theory.
Unquestionably, its steady rise since 20th January 2016 might actually indicate that perhaps the recent gloomier outlook for the US economy is misplaced and that the Fed are correct in their assumptions that a steady rise in interest rates, be it small, is justified.
“If we are somewhere near to the bottom in commodity prices then this is likely to be good news for some of the emerging markets”
Likewise, another economic indicator that seems to have turned a corner is the price of copper and iron ore, both of which have risen in recent weeks, admittedly from a very low base, and possibly due to some short covering, but worthy of a comment given the horrible collapse in the commodity markets over the last few years. Similarly, if we are somewhere near to the bottom in commodity prices then this is likely to be good news for some of the emerging markets and those commodity driven economies.
Arguably, we are still at a very delicate phase in terms of what the future may hold for the direction of global equity markets, and whilst there is still a distinct possibility that the recent lows might be tested again over the coming week’s investors will be repeatedly tempted to “buy on the dips” even though it has appeared of late that they have been “selling into strength”.
Finally, to conclude this week’s “Lowdown” it would be disrespectful not to mention that Berkshire Hathaway saw its net worth during 2015 jump by US$15.4 billion. Indeed, Warren Buffett mentioned that BNSF, its railroad company, has seen its performance improve “dramatically” after a difficult 2014. This is interesting given the recent turnaround in fortunes of the Dow Jones Transportation Average Index and its sensitivity to the real US economy.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes”
And in terms of Mr Buffett, well he did make a comment last year when he said that “stocks are going to be higher and perhaps a lot higher 10 years from now, 20 years from now”.
He also once said“if you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes” perhaps we have all become too short-term given that in today’s financial markets we focus far too much on the central bankers and macro noise.
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 .