The Lowdown on Markets to 7th April 2017
World Markets at a Glance
In this week’s issue
- The US launches a missile attack on a Syrian airbase after Syria’s chemical attack.
- Russia’s president Putin condemns the US action saying Russian-US relations damaged.
- The US and Chinese presidents hold talks in Florida with North Korea on the agenda.
- Last month’s US jobs numbers are disappointing but interest rate hikes are still possible.
- Global investors have been reducing their position in US equities in favour of Europe.
- Equities still remain the asset class of choice however investors are focusing on value.
“Geo-political risks generate some nervousness in the global markets”
As the news broke that the United States had launched a missile attack on an air base in Syria most traders and investors began to worry that the financial markets might begin to suffer from a fall out of investment confidence and subsequently trigger a period of volatility, and perhaps even worse still, a short-term flash crash in riskier asset classes such as equities, however, this turned out not to be the case.
Understandably, condemnation from the Russian authorities quickly followed, and of course, this then quickly led to a spike up in the price of crude oil, as concerns mounted over supply issues if an escalation in hostilities were to follow. Also we saw a predictable rise in the gold price and a flight to safety from some investors into the likes of the yen and some highly rated government bonds, which under the circumstances, is logical. Never-the-less, a sense of uncertainty did remain throughout the day.
Clearly, this action taken by the US administration would seem to be a one-off strike in retaliation for that horrific chemical attack on the rebel held town of Khan Sheikhoun in north western Syria where more than 80 people were killed and hundreds suffered from symptoms consistent with a reaction to a nerve agent. After the US military had launched their attack the President of the United States of America, Donald Trump, made the following speech:
“On Tuesday, Syria launched a horrific chemical attack on innocent civilians. Using a deadly nerve agent, Assad choked out the lives of hopeless men, women, and children.
It was a slow and brutal death for so many. Even beautiful babies were cruelly murdered in this very barbaric attack. No child of god should ever suffer such horror.
Tonight I ordered a targeted military strike on the air field in Syria from where the chemical attack was launched. It was in the vital national security interest of the US to prevent and deter the use of deadly chemical weapons.
There can be no dispute that Syria used banned chemical weapons, violated its obligations under the chemical weapons convention and ignored the urging of the UN Security Council. Years of previous attempts at changing Assad’s behaviour have all failed and failed very dramatically.
As a result, the refugee crisis continues, and the region continues to destabilise, threatening the US and its allies.
Tonight I call on all civilised nations in seeking to end the slaughter and bloodshed in Syria and also to end terrorism of all kinds and all types.
We ask for God’s wisdom as we face the challenge of our very troubled world. We pray for the lives of the wounded and the souls of those who have passed.
And we hope that as long as America stands for justice, peace and harmony will prevail. Good night and God bless America and the entire world.“
What is quite clear from this US administration is that they are prepared to take quick evasive action when required which could be viewed by some as quite distressing. Clearly, relationships between the US and the Russians have become tense with the Russian President, Vladimir Putin, condemning the US cruise missile attack saying that America had broken international law, therefore, seriously damaging US-Russia relations.
Prior to the US-Syrian strike the US president had held a meeting in Mar-a-Lago, Florida, with the Chinese president XI Jinping debating many important issues, including the possible nuclear threat from North Korea. Following that meeting it has been reported that the US navy has now deployed a strike group towards the western Pacific Ocean to provide a presence near the Korean peninsula. In respect to this action, the assumption must now be that the Chinese president has actually agreed to this US presence in the region.
Regrettably, in between these two actions came the sad news that a hijacked truck has ploughed into shoppers in Stockholm, Sweden, killing at least three and injuring many more. The suspect was a 39-year old man from Uzbekistan who was facing deportation. Clearly, this has been a sad week with the escalation of geo-political risks and a further terrible loss of life.
“It is still likely that the Federal Reserve Bank will raise interest rates again in June”
And now moving onto the economic landscape, the news on Friday that only 98,000 US jobs were created in the month of May was dreadful news given that it is only the fourth time since 2013 that less than 100,000 jobs have been created in a given month, moreover, the numbers for the last two previous months have also been revised down. However, the report also showed that the US jobless rate has actually edged down to 4.5 per cent from 4.7 per cent; it’s lowest in almost 10-years, which is some consolation. Therefore, it is still likely that the Federal Reserve Bank will raise interest rates again in June.
Other issues of contention that gave the markets a reality check last week was the uncertainties over whether President Trump has the ability to secure the passage for his US tax reforms that were such a core part of his pre-election campaign. Also the markets appeared unappreciative about the Fed’s comments on reducing the size of its huge balance sheet that has been created over the years by its quantitative easing programme. Similarly, in Europe the ECB president, Mario Draghi, seemed to be talking down the recent speculation that the central bank were edging nearer to a tighter monetary policy in the eurozone.
However, on the investment backdrop it would appear that global investors have taken into their stride the recent geo-political and economic doubts and are now focused around their strategic and tactical asset allocations, and in respect to this, we have seen the largest withdrawals in US equity funds in more than 18 months, in favour of European equity funds, which appear cheaper based upon a valuation perspective. Certainly, since the US administration failed to push through their healthcare reforms investors have become more sceptical about US assets and are more inclined to look at other regions such as Asia, emerging markets and of course Europe.
“The markets could experience a period of higher volatility over the coming months”
And so to conclude, arguably we have entered a period of intensified uncertainty especially from the geo-political risks that are very difficult to forecast an outcome. Plainly, the bull market is now in its ninth year, the central banks are beginning to withdraw their monetary support, in favour of a more fiscal strategy, and whilst corporate earnings have not grown in the past three years, things could be different over the next four or five years. The Pension funds appear to be between a rock and a hard place owning very expensive bonds whilst global equity investors are finding better opportunities as the global economic recovery continues to broaden out.
Understandably, the markets could experience a period of higher volatility over the coming months but with cash still on the side-lines and the rotation out of bonds and into equities still to happen the likelihood is that global investors will continue to have a “buy on the dips” mentality unless of course one of the geo-political problems becomes a real threat.
Peter Lowman Chief Investment Officer
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 .