The Lowdown on Markets to 17th June 2016
World Markets at a Glance
In this week’s issue
- Global investors remain cautious in the lead up to the European Referendum vote.
- The German 10-year benchmark bond dips into negative yield territory for the first time.
- Both the UK and US central banks keep interest rates on hold sighting Brexit concerns.
- In commodities the gold price touches a near two-year high whilst crude oil drifts lower.
- In the foreign exchange market sterling has a volatile week while the yen strengthens.
- “Brexit” or “Bremain” it’s our objective to seek out long term investment opportunities.
“As the European Referendum vote draws near risk aversion takes hold”
As the United Kingdom prepares to vote on whether to stay or exit the European Union, global stock markets around the world continue to react nervously towards the possible outcome. Certainly, in recent weeks we have seen the opinion polls repeatedly indicate that momentum for Brexit was on, however, with the tragic news over the week-end that MP Jo Cox had been brutally murdered has ignited some voters to re-think their views and possibly back the “remain camp”, which in turn, has seen stock markets respond positively this Monday morning. Indeed, global equities have rallied and sterling has strengthened, amid signs that the British people are warming towards the European Union ahead of the referendum on Thursday.
Equally, the book makers are still showing that the “remain vote” is the expected outcome at the end of the week , none-the-less, global investors have still been reducing their asset allocations towards riskier asset classes over recent weeks, in fact, assets in the UK fund industry have fallen by about a fifth over the past 12 months as investors switched their emphasis towards “safe haven assets” such as government bonds, gold bullion, cash, and selected currencies such as the yen and US dollar.
“Other members states have already voiced their opinions about holding their own referendums once the outcome from the British vote is known”
This current investor attitude towards holding less risky assets such as equities is mostly down to the fear about potential shocks hitting the markets from the Brexit vote, not totally because of Britain’s possible exit, but from the increased uncertainties it might have from a contagion perspective within the European Union, indeed, other members states have already voiced their opinions about holding their own referendums once the outcome from the British vote is known.
Certainly, the UK stock market has been rather subdued in recent weeks; with perhaps the mid-caps suffering the most from the sell-off, and some real investment concerns over the current valuations for certain UK property assets. But of course, it has also affected the European equity markets, and the euro, given that any exit would constitute some major structural changes within the Union. And of course, from a UK position any exit will certainly be countered by some immediate actions taken by the government, and the Bank of England, indeed, the Banks monetary policy committee have already voted unanimously to keep interest rates on hold until the outcome is known, equally, the US Federal Reserve Bank have taken a similar stance sighting Brexit as the biggest risk to the global economy, and the markets, over the coming months.
Admittedly, in respect to the US central banks decision to hold rates at their current level was not entirely down to the uncertainties surrounding the European Referendum. Whilst their targets for a reduction in the US unemployment rate has been relatively met, the Fed’s forecast for US economic growth, post the financial crisis, has been too optimistic. Clearly, economic growth in the US remains willfully low and whilst the Fed is unlikely to forecast a recession, at some point, this could be the outcome, and with the central bank seemingly between a rock and a hard place, that is rather a concern.
Likewise, in Japan the central bank seem to have the same problem, “caught between a rock and a hard place”, given that the BoJ have recently eased monetary policy, applying negative interest rate protocol, but then seeing their currency strengthen as global investors sort refuge in the yen, given the current uncertainties surrounding Brexit and the global economy.
“Quantitative easing has boosted the Bank of Japan’s balance sheet to over 80 per cent of GDP”
Obviously, Governor Kuroda, who like Janet Yellen has never worked in the private sector, has been forecasting economic recovery and higher inflation since he took over in March 2013 but regrettably for him this has not happened, which in turn, has now led to some serious questioning on the future prospects of Abenomics. Clearly, quantitative easing has boosted the Bank of Japan’s balance sheet to over 80 per cent of GDP, with the prospect that this figure will reach 100 per cent over the next 12 months, but with negative interest rates now operational, and more stimulus expected, the BoJ could now be faced with the prospect of being the first central bank to engage in helicopter money.
Unfortunately, the recent flight into safe haven assets, by many professional investors, would seem to indicate that there is an uncertain feeling about current central bank policy around the world and that the authorities seem to be “paving over rivers” whilst “travelling down roads going nowhere” which is a concern given the high expectations perceived around the intervention from central banks some years back.
“Since March 2009 we have seen global equity markets rise sharply on the back of very loose monetary bank policies”
Equally, since March 2009 we have seen global equity markets rise sharply on the back of very loose monetary bank policies, which in turn, has given global investors an upsurge in their portfolios, but of course, with inflation and interest rates at historical lows, corporate profits subdued, and global economic growth so anaemic, then any unforeseen economic ,or geo-political shocks, are likely to have a telling effect on market sentiment, especially when taking into account that the current bull market is now one of the longest on record.
And so moving on to last week, the indecision’s surrounding the UK referendum saw global investors continue in their pursuit for government bonds, indeed, we saw the safe haven benchmark German Government bond yield dip into negative territory for the first time in its history, whilst the ten-year sovereign yield for UK and Japan bonds touched record lows all before recovering towards the end of the week. Likewise, in the US the 10-year Treasury yield touched its lowest point in in nearly four years before moving back up at the close of the five day trading week.
“We saw sterling react nervously to the Brexit conundrum”
In the global equity markets, Japan’s Nikkei 225 Index seem to suffer the most retreating by just over 6 per cent on the week whilst the US, European and UK markets declined by anything between 1 to 2 per cent. In the commodity markets the price of gold experienced a volatile week, initially touching a near two-year high, before retreating, whilst in the energy market we saw crude oil give up some of its recent gains closing below US$50.00 a barrel. However, it was in the currency market that we saw the most volatile moves, firstly, the US dollar reacted nervously towards the Fed’s dovish stance on interest rates, setting the tone for a stronger yen, and then secondly, we saw sterling react nervously to the Brexit conundrum.
Finally, as we enter this week knowing that the nation will now decide whether we remain, or leave the European Union, stock markets will clearly respond accordingly, and of course, regardless of the result, the directive will then be known. Investment Quorum is neutral as a firm on the referendum, and the outcome, however, what we will continue to focus upon is our client’s needs and above all their investment objectives knowing that whether it’s “Brexit” or “Bremain” the investment world will take it in its stride and will undoubtedly offer long term investors opportunities over the coming years.
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 .