The Lowdown on Markets to 15th April 2016
World Markets at a Glance
In this week’s issue
- Equity markets nudge higher but investors are wary after a mixture of confusing data.
- The leading oil exporting countries meet in Qatar but cannot agree to freeze production.
- Whilst US economic data appears disappointing figures from China are more supportive.
- Bonds continue to out-perform equities even with many yielding minimal or zero yields.
- The Nikkei 225 gains 7.0 per cent as a weaker yen provides the market with some relief.
- Whilst we are likely to experience further volatility equities are preferred over bonds.
“Global equity markets continue to be resilient but investors remain wary”
Whilst most global equity markets moved higher for the best part of last week investor sentiment turned rather cautious as the price of crude oil began to fall, and weaker data from the US took its toll, nonetheless, a better-than-expected set of economic data out of China was greeted with some relief from global analysts and the markets.
Clearly, investor and market sentiment is still being dictated to by three important issues, firstly, the direction of the crude oil price, secondly, the Chinese economy and thirdly, the “Yellen put”, will the Federal Reserve Bank continue with their loose monetary policy, and come to the aid of the markets when they experience any further difficulties.
“Will the Federal Reserve Bank continue with their loose monetary policy”
In respect to the future direction of the crude oil price, this is likely to be determined at this week-ends meeting of leading oil exporting countries in Qatar. Certainty, the relationship between Saudi Arabia and Iran is very important given that Iran have continually refused to consider freezing their production levels, even when the Saudis have been willing to consider such action. Disappointingly, the Iranians are not expected to attend this meeting, which is rather ominous, therefore it is unlikely that we will see an overall freeze agreement between the remaining OPEC members.
“The latest news from Qatar: The meeting broke up on Sunday at 9.00.pm without a deal being reached”
Basically, this meeting has been called in response to the recent collapse in the oil price where it fell to US$27.0 a barrel earlier in the year. Admittedly, the price has subsequently recovered but that is largely down to traders taking the view that some of the oil producers might take some action over the coming weeks, which could influence and stimulate a higher price.
Arguably, the severe crude price fall has hurt many of the oil producers in recent times, with the US oil shale producers being high up on that list, but of course, the fall in US oil production has helped to stabilise a heavily oversupplied market. Regrettably, just freezing the output might not be enough given the current high supply levels and the lower demand anticipated from countries such as China.
“Chinese economic data showed that their gross domestic product grew by 6.7 per cent year-on-year during the March quarter”
Moving on to last week’s economic data ,US manufacturing production fell for the second month in a row, led by a drop in mining and car manufacturing, whilst earlier market optimism was affected by disappointing corporate earnings figures. Yet in contrast to this, Chinese economic data showed that their gross domestic product grew by 6.7 per cent year-on-year during the March quarter. Also there were some hopeful signs from other data such as industrial production, retail sales and fixed-asset investments.
Whilst China’s economy is slowing, and creating some concern on Capitol Hill, the current rate of growth is still within Beijing’s full-year growth target range of 6.5 to 7 per cent, and of course, the Chinese government is still spending money on infrastructure which will eventually feed into the wider economy and help to generate growth.
Admittedly, there are accesses in the system such as oversupply of steel and iron ore but there is also much work to be done on important issues such as pollution, and complexed subway systems, given the number of people that are moving out of the countryside and into the cities. This in itself will require further investment in utilities such as water supply and power. This in turn, will lead to more investment into technology as the county develops and moves from an export economy to a consumer led economy.
“This data is likely to be viewed as good news by the US authorities”
In the meantime, this data is likely to be viewed as good news by the US authorities, given that on numerous occasions the Fed chair, Janet Yellen, has voiced some anxieties about outside forces such as a weakening Chinese economy having an effect on the recovery rate of their economy. Indeed, this has eventually led to the metaphor known as the “Yellen Put” whereby the Fed seem to come to the aid of the markets with a dovish statement on monetary policy, and so, lessening the chances of a meaningful crash in the markets.
Clearly, the equity markets have been very rewarding for global investors since mid-February, which is slightly surprising against a backdrop of weaker corporate earnings, weaker economic growth, the uncertain outlook for commodities, and a consistent flow of negative macro news. However, saying that the markets have been supported by the central banks, and their loose monetary policies.
The “central bank put” has become the “guardian of the markets”
Indeed, the “central bank put” has become the “guardian of the markets” protecting us from yet another severe financial crisis. Admittedly, in recent times we have seen many of them announce some unconventional methods, such as “negative interest rate protocol”, to try and boost economic growth, and raise inflation rates. This in turn, has seen bond yields fall to historical lows; several of the leading global currencies weaken off aggressively, whilst many of the global equity markets have rallied as investors increased their appetite for risk.
However saying that, government bonds have continued to out-perform equities so far this year, which is surprising given that there is US$7.4 trillion of the bond markets yielding zero yield and US$9.3 trillion yielding less than 1.0 per cent. Clearly, this asset class, along with gold bullion, and some careful chosen currencies, still hold some attractions in times of uncertainty, and with that in mind, it is likely that we will still see continued support for these believed “safe haven” assets classes.
In conclusion, we will be continue to focus upon many of these issues over the coming weeks, along with important issues such as “BREXIT” and the US presidential election, given that they are all likely to figure highly within the markets, driving investor sentiment, and overall returns.
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 .