The Lowdown on Markets to 13th May 2016
World Markets at a Glance
In this week’s issue
- Better-than-expected economic data seems to have been ignored by the equity markets so far.
- The global equity markets seem to be drifting and are lacking in any real direction.
- Money flows have seen a withdrawal out of global equities in favour of safe haven assets.
- Whilst central bank policy remains accommodative Brexit and elections take their toll.
- The price of crude oil edges nearer to US$50.0 a barrel boosted by supply disruption.
- Investor sentiment seems to be capping any upward momentum at the current time.
“The improving economic data is not being reflected in market sentiment”
Further signs of improvement in some of the global economic data do not appear to be reflecting in current market sentiment or investor confidence. In fact, global equity markets seem to be lacking in any real direction at the current time. If anything they have been drifting lower over the last couple of weeks and are about 3.5 per cent down since mid-April. This would seem a change in directional sentiment given that the equity markets have been responding to the price movements of crude oil over recent times, however, very recently the international benchmark, Brent Crude Oil, has rallied higher whilst markets have drifted lower.
Given this recent change in investment sentiment it might be worth noting one of the reasons that might be behind that. Indeed, if you look at the recent out flows from global equity funds you will find that since the beginning of this year global investors have actually withdrawn nearly US$90.0 billion from portfolio managers, and hedge funds, given that many of them appear to have struggled to navigate the markets in 2016. Equally, global equity markets have recovered from their steep sell-off in the early part of the year, which in turn, may have also caught out some fund managers.
“What has been driving markets in recent times, such as radical central bank policies, and the price direction of Brent crude oil, appears not to be functioning at the moment”
Certainly, what has been driving markets in recent times, such as radical central bank policies, and the price direction of Brent crude oil, appears not to be functioning at the moment, indeed, it now seems that there are other forces at work including the imminent Brexit vote, the Spanish election, and at the end of the year the US presidential election, which is currently gaining the most traction given the voting momentum gained over the past few weeks by Donald Trump.
Unquestionably, it’s the unknown that creates market uncertainty, and that normally leads to some nervousness, followed by a decline by global investors to hold riskier asset classes. Clearly, we have recently seen this happen, but in turn, it has also led to a recycling of funds out of global equities and into “safe haven” assets classes such as bonds, gold, selective currencies and money market funds.
“There has been some better economic data released last week”
Conversely, there has been some better economic data released last week, firstly, Germany’s, Q1 GDP growth rate expanded by 0.7 per cent in the first quarter of the year, compared to 0.3 per cent in the final three months of 2015, and secondly, in the United States, there are now signs that the US consumer is in good health, with consumer confidence jumping to an 11-month high.
Equally, in terms of central bank policy the European Central Bank announced some further details around their corporate bond buying programme, outlining proposals to stabilize market anxieties about the possibility of them buying up to 70 per cent of any one issue. Indeed, on Friday, the ECB assured the market, and its investors, that it would apply additional limits per issuer group following a predefined benchmark. Also the authorities confirmed that car groups would be included in their purchase programme. The ECB’s imminent European corporate bond buying programme comes at a time when doubts are growing that whether the Federal Reserve Bank will be in any position to raise US interest rates sometime soon due to their mixed US economic data. Certainly, the ECB are ready to add more stimulus if conditions were to deteriorate supporting president Mario Draghi’s previous statement that “they will do whatever it takes”.
“The Bank of England policy committee voted unanimously to maintain the Bank Rate at 0.5 per cent”
Likewise, The Bank of England policy committee voted unanimously to maintain the Bank Rate at 0.5 per cent and leave the stock purchased assets at £375.0 billion. This was widely expected given that the policy makers have lowered their growth forecasts, saying that there is increasing signs that the uncertainty associated with the European Union referendum has begun to weigh heavily on activity.
At the same time, the BofE committee did leave its inflationary forecasts roughly unchanged, but does expect GDP growth to slow. However in the near term, prospects for the likes of China and emerging markets seem to have improved, although downside risks still remain. Conversely, a modest pace of growth is expected from the UK’s main trading partners over the forecast period.
“This week’s US inflation report will be very important, and will be carefully scrutinized by the Fed”
Now on a more surprising announcement, last week’s release of the April US retail sales data, and unexpected return of the US consumer, might have some consequences for the FOMC members, given that it has been the slow-moving retail sales figures that have kept the 12 committee members unwilling to consider raising interest rates. Admittedly, this week’s US inflation report will be very important, and will be carefully scrutinized by the Fed, along with any further economic data that they might receive, prior to their meeting in mid-June. None-the-less, the futures market is only pricing in a 6 per cent chance of them raising rates in June, with July being more likely, if at all.
Whilst we have mentioned in recent weeks the global equity markets have been less responsive to the crude oil price, it is likely that they will become more correlated again in the months ahead, and therefore, any supply disruptions or change of stance by the Opec committee members are likely to determine the future direction of oil prices. Indeed, traders are currently trying to balance out short term outages in some major producers against rising supplies elsewhere.
“The financial markets appear to have become less anxious about a hard landing in global economic activity”
Certainly since mid-February, the financial markets appear to have become less anxious about a hard landing in global economic activity, or at least, about any potential prospects for a clash between slowing economic activities and any untimely monetary tightening measure from the United States or unfavorable fiscal policies from China. However, uncertainties surrounding Brexit and those two very important elections are still likely to act as a considerable headwind for the stock markets over the coming months.
Equally, over the next two to three weeks it might well be the old adage of “sell in May” that creates the strongest headwind for the global equity markets, but of course, with interest rates now at zero, or even worse negative, and western sovereign bond yields at historical lows, then global investors will need to consider whether to remain in cash, and low risk assets, or to re-engage into the equity markets to try and seek out better returns, in particular, those investors that are income seekers.
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.
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