The Lowdown on Markets to 9th September
World Markets at a Glance
In this week’s issue
- Global equity and bond markets stutter as impending monetary policies become blurred.
- In Europe the ECB avoid giving the markets any real forward guidance on future actions.
- The Federal Reserve Bank continues to ponder over the timing for their next rate hike.
- Life is becoming more difficult for bond proxies but will investors switch their allegiance.
- Clearly the central banks have done the bulk of the heavy lifting so is it time for change.
- Anxiety enters the markets but it is likely that the “buy on the dips” mentality continues.
“Global equity and bond markets wobble on the prospects of higher rates”
Have we not been here before, the Federal Reserve Bank sneezes and the world’s global equity and bond markets catch a cold. Indeed, we have even heard that US Democratic presidential candidate, Hilary Clinton, is being treated for pneumonia which has certainly added to the mix of uncertainty over the last few days.
Similarly the European Central Bank president, Mario Draghi, seems to have added to the monetary dilemma by announcing that there would be no further policy actions taken at the current time and then seemed to avoid giving the press conference any future guidance towards the current state of play with regards to the European economic outlook. Indeed, the decision by the ECB, not to give any future guidance, or clear indications as to the timetable for further quantitative easing beyond March 2017, was taken by the markets as a bearish sign.
“The markets have become very reliant on immediate action by the global central banks”
Unfortunately, the markets have become very reliant on immediate action by the global central banks and any disappointments tend to lead us to a sharp pull back in financial assets. Certainly, in respect to the United States, the Fed are getting very anxious about their current monetary policy, and whether they should raise rates before, or after, the US presidential election. Indeed, some believe that they should raise rates by 0.25 basis points in September followed by a similar hike in December.
In respect to Japan, the leading indicators seem to be showing us that the BoJ want to move out of their current “negative interest rate protocol strategy”, and stimulate their economy more towards reaching their inflationary objectives. Likewise, whilst the market treated Draghi’s actions as rather disappointing, it was clear that expectations were far too high, given that the “Draghi Put” has until March 2017 to run, therefore, he has plenty of time to make meaningful changes if desired.
“Who will be the next big buyer of bonds”
Regrettably, this could makes life quite difficult for bond proxies, given that over recent years bond buying has become a crowed trade, which in turn, has left sovereign bond yields at their present-day historical lows. Understandably, this now leads us to the question “who will be the next big buyer of bonds”, once the central banks stop their monthly bond buying programmes. Surely, the authorities will need to consider other methods of economic stimulus sometime soon, which could see the start of the unwinding of bond positions leaving markets rather unpredictable.
Unquestionably, since the global financial crisis, the central banks have done the bulk of the heavy lifting, to try and boost economic growth; however, perhaps it’s now time for the next phase of the global economic recovery to be stimulated by other sources such as the global consumer, or indeed, government spending, after many years of austerity.
“The United States was adamant that the emphasis should now be on growth rather than austerity”
Even central bankers such as Mario Draghi have stressed that monetary policy alone cannot get the world’s economy out of its current condition. In fact, at last week’s G-20 summit in China the United States was adamant that the emphasis should now be on “growth” rather than “austerity”, and subsequently to that meeting, there now seems to be a shift in the strategy of many of those G-20 governments.
Understandably, over the last few days rising government bond yields have spooked the markets, but quite possibly Fridays sharp sell off was down to investors taking this opportunity to lighten up on financial assets, given the fact that after so much central bank intervention, and market peaks, the world still seems to be delivering anaemic growth, hence the worry that perhaps the markets have got ahead of themselves and are now quite expensive.
“It is likely that sophisticated investors will look at this situation as a buying opportunity”
Maybe current monetary policy cannot go much further and that central bankers now need to reassess the situation and set a new course, however, in that circumstance it might mean that the present day sovereign bond rally has peaked, and that global bond investors, who are sitting on substantial profits might want to consider switching their allegiance to other asset classes. This in turn, could lead us to a period of higher volatility, rising bond yields, and uncertain equity markets, but in the light of what the central banks are able or unable to do over the short-term, it is likely that sophisticated investors will look at this situation as a buying opportunity, especially if the pull-back in markets is significant.
And so in conclusion, looking at the stock markets last week we saw interest rate sensitive stocks in the US react nervously towards any thoughts of a rate hike by the Fed later on this month. In the UK the FTSE 100 Index gave back some of its recent gains, whilst in Europe, sentiment suffered from the absence of any real guidance offered by the ECB and Mr Draghi. In Asia, emotions ran high over the recent North Korean nuclear test and the inaction’s by the European Central Bank, whilst in the bond markets we continue to see an inverse in bond prices and a rise in yields.
Clearly the summer months are now behind us, and perhaps investors do need to brace themselves for a few weeks of uncertainty, and a pick-up in volatility, particularly if we suffer some frustrations along the way. However, the equity bull market still remains intact, even if at a mature stage in the cycle. Admittedly, equity prices have moved up a long way since the markets bottomed out in March 2009, but the ownership of great companies, that continue to deliver excellent returns, can still be justified over the longer term, especially if you take into consideration what Warren Buffett once said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
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 .