The Lowdown on Markets to 5th August 2016
World Markets at a Glance
In this week’s issue
- Central banks continue to offer their support through additional QE and monetary policy
- The governor of the Bank of England delivers a stark warning followed by more stimulus
- In the US the latest jobs numbers shocks the market and puts further pressure on Fed
- Sterling reacts to the Bank of England’s additional stimulus package along with equities
- In the commodity markets gold falls on US jobs data as crude oil remains above US$40
- Do the central banks have the global economy and the markets under control?
“Central Banks take action but de-coupling will happen very soon”
Clearly, the world appears to be in a period of quantitative easing infinity as central banks continue to offer their support to try and cushion any future insecurity that comes about by the events such as Brexit, the slowing down of the Chinese economy, the unbalanced commodity markets, and the uncertainties from continual geo-political risks.
Certainly, in the past couple of weeks we have seen the governor of the Bank of Japan, Haruhiko Kuroda, offer the markets a further monetary appetizer by saying it would increase its exchange-traded fund purchases to an annual pace of ¥6 trillion, up from ¥3.3 trillion. However, it has left its government bond buying programme unchanged at ¥80 trillion, and its interest rate unchanged at -0.1%. This would seem to suggest that the BoJ are in a “wait and see mode” prior to announcing a much bigger monetary easing package. In fact, with their currency, the Japanese yen, heading back towards the USD /¥100.0 level and inflation remaining stubbornly low, Mr Kuroda is expected to do much more in the not too distant future.
“We saw the governor of the Bank of England, Mark Carney; announce the biggest UK stimulus package since those gloomy days of the financial crisis”
Equally, last week we saw the governor of the Bank of England, Mark Carney; announce the biggest UK stimulus package since those gloomy days of the financial crisis. Indeed, after he delivered a very stark warning by saying that there was a “clear case for stimulus, and stimulus now” he proceeded in cutting interest rates from 0.5% to 0.25%, our first rate cut in seven years, announced a new £70 billion bond-buying programme, that included £10 billion in corporate bonds, and an additional £100 billion funding scheme for banks.
The extent of this package certainly took many in the market by surprise, which subsequently saw sterling fall by a further 1.5% against the US dollar, the FTSE 100 and 250 indices rise by a similar amount, and yields on British government bonds fall to new lows. Also we saw sterling corporate bond prices rally in anticipation of the newly announced corporate bond-buying scheme. Whilst the gloomy outlook presented by Mr Carney is worrying, the market’s reaction is very simple; it expects more accommodative action from the governor over the coming months.
Unquestionably, this prolonged period of quantitative easing, and other monetary stimulus, seems to have produced asset bubbles in both equity and bond markets which will need to be justified by seeing stronger corporate earnings over the coming months and years. Indeed, it would now seem that a period of “irrational exuberance” has possibly taken over from common sense, and of course, that could be dangerous given that we are slowly moving towards a period when the leading central banks around the world begin to decouple, as they navigate different courses, given that they are at the mercy of their own domestic economies.
“Janet Yellen, will address the audience, and the financial world, as to the current status of the US economy”
Now on the point of decoupling, the markets will now start to focus themselves upon the Jackson Hole Wyoming conference which is on the 26th August 2016 when the Fed chair, Janet Yellen, will address the audience, and the financial world, as to the current status of the US economy, and most likely, the Fed’s interruption of monetary policy going forward. Certainly, the recent economic data would seem to indicate that we are not far away from a further rise in US interest rates.
Furthermore, last Friday’s US jobs data, which saw a further 255,000 jobs added, far more than was forecast, and a modest improvement in wage growth, and average hours worked, will add further pressure on the Fed to raise rates. In fact, a US interest rate hike in September could now be back on the table, and therefore, it will be one of Ms Yellens priorities to carefully explain their intentions on future monetary tightening so as not to panic the markets when it actually happens.
Admittedly, with the US presidential election drawing ever nearer, the unknown effects from Brexit, Mr Carney’s recent statement on the outlook for the UK economy, a stagnating Eurozone, and the uncertainties surrounding the crude oil price, we could see the Fed committee holding off until the end of the year. However whatever the decision, we are heading towards the US central bank decoupling from many of the other leading central banks around the world which is likely to create a period of higher volatility levels within the equity, bond ,and currency markets, as they re- adjust to monetary tighten in the United States, and further monetary easing elsewhere.
“In the UK the FTSE 100 Index ended the week at its highest level for more than a year”
And so moving onto last week’s markets, in the US the stronger than expected US jobs data pushed the indices higher, with the technology stocks doing particularly well, even the banks moved higher. Similarly, in the UK the FTSE 100 Index ended the week at its highest level for more than a year as it digested the actions taken by the Bank of England. In Europe, the news of the economic data out of the US helped the markets recover some of their earlier losses at the beginning of the week. And in Asia the Japanese market continued to suffer from its disappointment towards the BoJ’s recent stimulus package.
In the government bond markets, yields generally rose on both sides of the Atlantic as the central bank policy sensitive asset class took on board the recent events and stimulus packages that have been announced. However, it is likely that yields will drift lower in the countries that have extensive bond-buying programmes, and are likely to cut interest rates even lower.
“We have seen a change in investor sentiment towards high yield bonds on the back of the recent rapid drop in the oil price”
As for commodities, the price of gold bullion tumbled on the latest announcement from the US regarding jobs, whilst the price of crude oil remained under scrutiny, but ended the week above the physiological US$40.0 a barrel level. However, what is interesting is that we have seen a change in investor sentiment towards high yield bonds on the back of the recent rapid drop in the oil price, but in contrast to this, emerging market bond funds have been in favour, and have seen some strong inflows over the past weeks. In fact, even emerging market equity funds are starting to gain some traction from investor’s after a lengthy period of being in the wilderness.
Arguably, we seem to be moving into a very interesting period, with the central banks working hard, possibly thinking that they have the world’s economy under control, and the trend of the markets firmly in the palm of their hands, but in reality, they probably don’t, in fact, in recent times it would appear that some global investors are starting to lose faith in central bank policy, given the fact that the global economy still seems to be only stuttering along.
Admittedly, the seven year bull market remains intact, but it is becoming much more likely that we will experience a period of consolidation over the coming weeks, however, until that happens, the markets are likely to trend upwards.
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 .