The Lowdown on Markets to 22nd April 2016
World Markets at a Glance
In this week’s issue
- US corporate earnings results disappoint the markets but the price of crude oil rises.
- In the currency markets the yen falls sharply on rumours of further action from the BoJ.
- The Federal Reserve Bank and Bank of Japan will offer their current thoughts this week.
- The price of iron ore rallies to just under US$70.0 a tonne but excesses still remain.
- Likewise the price of crude oil continues to rally and reaches US$45.0 a barrel.
- Whilst bonds continue to out-perform equities for this year value remains in the latter.
“US corporate earnings disappointment which affects market sentiment”
Whilst global equity markets in recent times have been responding more towards the direction of the crude oil price, this was not the case last week; indeed we saw them trade lower, given their dissatisfaction in the latest batch of US corporate earnings results. Disappointing results from some of the leading US technology companies, such as Microsoft and Alphabet, saw the market disengage from its recent trend of tracking the energy price by focusing more on corporate America, especially with other companies within the conglomerate and machinery sectors suffering from a similar fate.
Since mid-February Wall Street has rallied by nearly 15 per cent, as it tracked the rise in the oil price, responded to some improving domestic and global economic data, and helped by the “Yellen Put” of remaining dovish towards further interest rate hikes. Never-the-less, there was also some hope that perhaps the US stock market might be pushed even higher by some positive surprises from the first quarter company earnings season. Sadly however, this has not been the case as yet, and of course, much might now depend on the market and analyst’s views in respect to the individual company’s forward guidance statements for quarter two and beyond.
“Approximately 82 per cent of those companies that have already reported have managed to report earnings above the expectations of those analysts on Wall Street”
Certainly, from an analyst’s perspective a recent poll carried out by Bloomberg showed that they were projecting a 9.3 per cent drop in first quarter income from the S&P 500 companies, however; approximately 82 per cent of those companies that have already reported have managed to report earnings above the expectations of those analysts on Wall Street.
Also acting as a backdrop last week was the moves in the currency markets, as we saw a sharp drop in the yen, which was reportedly down to rumours that the Bank of Japan might be considering the introduction of negative interest rate loans, this in turn, saw the Nikkei 225 Index rally for an overall rise in the week of 4.3 per cent. Clearly, this week’s US and Japanese central bank policy meetings will be scrutinised very carefully by the markets, and its professional investors, in an attempt to try and second guess what their actions might mean for asset classes and market direction.
Clearly, the current stance taken by the Bank of Japan, of “negative interest rate protocol” has seen yields on long-dated Japanese government bonds dip to record lows, and might even fall further if the central bank announces further monetary policy changes this week.
“Mario Draghi, the ECB president, remains unyielding in his ‘whatever it takes’ strategy to get the European economy back on track”
Similarly, last month we saw the European Central Bank announce that they would be keeping their ultra-loose monetary policy unchanged, recalling that they had cut their interest rates further into negative territory, whilst boosting the size of their quantitative easing programme. Determined to generate a higher European economic growth, and inflation rate, Mario Draghi, the ECB president, remains unyielding in his “whatever it takes” strategy to get the European economy back on track.
Perhaps most disappointingly for the ECB has been the reaction in the currency markets, given that since lowering their interest rates into negative territory, the single currency has strengthened rather than weakened. Indeed, this seems to have been the case for much of 2016, and whilst this might be good for cheaper imports into Europe, it does create even less inflation which will not help the central banks current monetary policy.
Admittedly, the ECB are in good company, along with Japan, Norway, New Zealand and Sweden who have also seen their currencies strengthen, after joining the exclusive “negative interest rate club” or being proactive in their loose monetary policies. Consequently, this might be a sign that the markets are losing some of their faith in central bank policy, hence, the recent unexpected currency moves.
“The pre-season pick-up in construction and the property market in China have improved the prospects for steel demand”
Equally, we have seen some unusual moves in commodity prices, with the likes of iron ore rallying to just under US$70 a tonne. Indeed, the pre-season pick-up in construction and the property market in China have improved the prospects for steel demand. Whist this would seem to be good news for the commodity sector, which has had a torrid time of late, it must be remembered that both global steel demand is expected to fall this year, while many of the steel mills are still struggling with excess capacity.
But of course, the main focus for the markets will continue to be on the crude oil price, given that the price has risen for three straight weeks and is now trading at US$45.0 a barrel. Understandably, after such a spike up in the oil price, in such a short period of time, questions are now being asked as to what might happen next. Clearly, the recent meeting of OPEC members in Doha did not go totally to plan, with certain members refusing to agree to a freeze in their production levels.
“The main focus for the markets will continue to be on the crude oil price”
Clearly, after almost two years of allowing the oil price to fall, this meeting was very important and saw attendees ranging from the kingdom, to countries outside the cartel such as Russia. What we then saw in the aftermath of the meeting was pullbacks in the oil price, followed by an impressive recovery back to US$45.0 a barrel, its highest level since early November, and a 60.0 per cent price gain since January when the price slipped below US$30.0 a barrel.
Whilst OPEC were unable to agree to the freeze, the deadlock cannot be ignored, given that it could lead to a full scale market share battle that could take us way beyond a 2017 recovery and a period of uncertainty and volatility. This could then lead to a much more volatile time in the stock markets similar to what we experienced earlier on in the year.
Indeed, this oil crisis has already burnt a large hole in the kingdoms reserves, which has now led them to raising US$10.0 billion from a consortium of global banks, their first global borrowings in 25 years, and a suggestion that Saudi Arabia may now raise its first global bond on the back of the loan deal. Equally, what will be interesting is this week’s address by Prince Mohammed bin Salman’s who will be publishing his “vision for Saudi Arabia” post-oil era.
“In countries like the United States and Japan householders have been saving much of their increased income or paying back some debt”
Another issue of debate has been the lack of spending by the global consumers over the past couple of years, considering the dramatic fall in crude oil prices. In principle you would have thought that the savings from energy prices would have been fed back into the global economy, by additional consumer spending, but in countries like the United States and Japan householders have been saving much of their increased income or paying back some debt.
Understandably, increased Japanese consumption tax in 2014 and concerns about whether the Fed will raise interest rates this year has probably had a negative effect on consumer sentiment, whilst austerity and poor expectations for the eurozone has had a similar result. On the other hand, with interest rates falling to historical lows it has also been important for some consumers, who are also income seekers, to invest those energy savings into income seeking products rather than spend it on the high street. Indeed, in the UK it has already been forecast that dividends are likely to fall further this year, due to the gloomy outlook and “BREXIT” worries. Conversely, the global picture for income looks much brighter, where pay outs are rising, given that their rates of economic recovery are being assisted by loose monetary policies.
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 .