The Lowdown on Markets to 3rd June 2016
World Markets at a Glance
In this week’s issue
- Weaker than expected US economic data dominates last week’s stock market moves.
- Negative yielding global government debt has now risen to over US$10.0 trillion.
- Likewise there is now US$380.0 billion worth of corporate bonds with sub-zero yields.
- The latest polls reflect that the “Brexit” vote has gained further momentum.
- However, the book makers are indicating a “Bremain” result.
- The global economy and inflation needs to strengthen so interest rates can normalise.
“Weaker economic data dictates asset class movements over the week”
Some rather surprising and disappointing weaker economic data out of the United States dominated last week’s stock market movements. Firstly, the US jobs report for last month showed that the non- farm payroll numbers for last month were weaker than market expectations, rising by a miserable 38,000, well short of the consensus forecast of 160,000. Moreover, there were downward revisions to the previous two months readings whilst a drop in the jobless rate to 4.7% from 5.0% was driven by a big fall in the labour force.
This recent number will clearly have a damaging effect on how the Federal Reserve Bank views their next move for interest rates. Whilst there was a distinct possibility that they might have raised rates either in June or July, this recent news is likely to quash any of those prospects, pushing out the next interest rate hike to nearer the end of the year. Obviously, the UK vote on the European referendum at the end of this month, and the US presidential election in November, will have a major influence on how the Fed committee members vote on any future monetary tightening.
“All of this data had an immediate effect on the US dollar, which retreated against the euro and the yen”
Further bad news then followed when the Institute for Supply Management announced that the non-manufacturing index for May came in at its lowest level since February 2014. Understandably, all of this data had an immediate effect on the US dollar, which retreated against the euro and the yen, but with a mixed reaction on the commodity currencies which are more dependent on global growth. Likewise, whilst many of the equity markets retreated, the “core” sovereign debt markets saw their yields retreat as investors decided to reduce some risk in their portfolios in favour of “safe haven assets” such as bonds and money markets.
In fact, with so much central bank stimulus and global investor buying of sovereign debt over recent years the amount of negative-yielding government debt has now risen above an unbelievable US$10 trillion. Indeed, the amount of sovereign debt trading with sub-zero yield climbed to US$10.4 trillion in the month of May adding a further 5.0% to the overall number. Furthermore, negative yields are not just confined to sovereign debt markets, corporate bonds with negative yields have also climbed to US$380.0 billion according to some leading research houses.
“The normalisation of interest rates and bond yields is necessary for capitalisation to work properly”
Clearly, negative yields in bond and money markets are of concern, particularly, for the pension fund industry, and households, given that they need to cover their liabilities, certainly, in respect to savers little, or no income flows, has a habit of leading to lower consumer spending, which in turn, has poor ramifications for the global economy. Unquestionably, the normalisation of interest rates and bond yields is necessary for capitalisation to work properly; regrettably, zero or negative interest rates is not a real option over the very long term.
Never-the-less, central banks will remain accommodative whilst the global economy continues to suffer from all of the anomalies that are persistently creating uncertainties around the world at the current time.
“With just 18 days to go the most important issue that is currently complicating matters in the markets is the European Referendum”
And so, with just 18 days to go the most important issue that is currently complicating matters in the markets is the European Referendum. Clearly, emotions are still running high with so many voters not sure how they might vote on the day. Certainly, the latest opinion polls are suggesting that more people are thinking of voting for “Brexit”, whilst the bookies are showing odds on to “Bremain. Now the prospect of a pronounced period of turmoil in the markets, should the UK vote to leave, could be immense and we have already seen a correction in stocks within the mid and small caps and the UK commercial and residential property sectors.
However, in the event that UK voters choose to remain in Europe then it is likely that we will see a relief rally in the markets, even if it is only for a short-term period. Either way, equity markets are then likely to focus themselves back upon other important issues such as the Federal Reserve Banks next decision on monetary policy, the Chinese economic slowdown, and or course, the outcome of the US presidential election in November.
But regardless of whatever happens over the rest of the year we desperately need to see the global economy strengthen, and some inflationary pressures appear so as the leading global central banks can begin to slowly raise interest rates in preparation for the next global event, or indeed, recession.
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 .