The Lowdown to 5th December 2014
World Markets at a Glance
In this week’s issue
- The positive surprise in US non-farm payroll numbers supports the US economic recovery.
- Understandably the Federal Reserve Bank might need to raise rates earlier than is expected.
- Amazingly OPEC left its production targets unchanged sending out a clear message of intent.
- In the UK the chancellor delivered his final autumn statement before the General Election.
- President Putin said “Russia would prevail against attempts by the west to weaken them”
- The outlook for global equities still look more promising that fixed income or indeed cash.
What does this mean for the markets and asset classes?
“The US economy continues to show signs of recovery but risks remain”
Arguably, the US economy is recovering and this was firmly supported by last Friday’s non-farm payroll numbers, which surprised on the upside with 321,000 new jobs being created. Not only did this figure mark the 10th successive month that the US economy has generated 200,000 or more new jobs, but the average hourly earnings rate climbed by 0.4 per cent, whilst the unemployment rate remained steady at 5.8 per cent. Clearly, this is good news for the US and for the rest of the global economy.
Equally, if the US economic data were to continue to strengthen over the coming months then there must be a possibility that the Federal Reserve Bank will consider raising interest rates a little earlier than the market is currently expecting. However, the Fed are only likely to take this course of action if they were confident that the US economy was now robust enough for a programme of monetary tightening, subsequently, the likelihood for the first rate hike is still thought to be around mid-June or early September 2015.
Understandably, there are still a number of wide-ranging risks in the world that could derail the US, and the global economic recovery. Issues such as deflationary pressures that seem to be building up in the eurozone, the recent drop in the oil price, a stronger dollar, and of course the ongoing tension that are mounting between the West and Russia over the Ukraine could still be a game changer.
Clearly, in the eurozone the recovery has stalled, and inflation has declined further, prompting the question “how long can it now be before the European Central Bank announces a full programme of sovereign quantitative easing. Obviously, we will need to wait until 2015 before such action, but it now seems unavoidable that ECB president, Mario Draghi, will stall for very much longer, probably announcing “full blown” QE either in January or March.
In terms of the price of oil, OPEC has recently sent out a clear message that they intend to keep prices low, which in turn, is likely to slow down production growth from outside OPEC. Conversely, the peak winter demand for oil should help to support the price in Q1 2015, therefore, stabilizing the recent falls that that have now taken crude oil prices down to a five-year low.
Certainly, the collapse of the oil price has severely weakened the Russian economy, along with the western sanctions, which has now created a dangerous situation. Indeed, in Vladimir Putin’s recent annual state at the Kremlin, he said, that “Russia would prevail against attempts by the west to weaken them”. The Russian president then went on to say that the Crimea for the Russians was like “the Temple Mount in Jerusalem for the followers of Islam and Judaism”.
Clearly, this situation could further undermine the eurozone, which in turn, might have ramifications for the rest of the world and the global economic recovery. None-the-less, it is still expected that global growth will accelerate in 2015, driven by the recoveries seen in the two largest economies in the world, the United States and China.
Surprisingly, and for no real reason, we have seen the Chinese stock market rise aggressively over the past few weeks, as investors switched out of other asset classes such as government bonds, cash deposits, property and precious metals. This change of investor sentiment can only really be down to the diminishing returns that have been seen from those other asset classes, which in turn, could see the Shanghai Composite Index rise further of the coming months.
In the UK the chancellor George Osborne delivered his final autumn statement before next year’s General Election in May 2015. He’s slogan of “we are on course to prosperity” has certainly laid down a gauntlet to the electorate, “either they let the present government finish the job that they have started”, or “squander the economic security that they have gained by allowing the opposition to form the next government”.
In terms of the content of the autumn statement, it looked more like a mini- budget with numerous new provisions, and a raft of other measures, ranging from changes in residential stamp duty, the tax treatment of pension annuity payments, the freezing of fuel duty and abolition of air passenger duty for children under 12, to changes in the ISA rules allowing spouses, and civil partners, to inherit ISA’s and ISA allowances for deaths from 03rd December 2014.
Clearly, whoever resides at number 10 and 11 Downing Street from next May will be faced with the same task of announcing further austerity packages, given that UK public finances and economy still remains fairly fragile.
Clearly, we are now at a delicate point in terms of global equity markets, given that we could be in either a bull, or perhaps, a secular bear market. Equally, we are about to see the decoupling of the four leading Central Banks in the world, as the Federal Reserve Bank and Bank of England consider monetary tightening, whilst the European Central Bank and Bank of Japan commence with further monetary stimulus.
Equally, the outlook for global equities continues to look more promising than either fixed income, or indeed cash, which I hasten to add, looks very unattractive. Without a doubt, it would still appear that the combined efforts from the world’s largest central banks are still pushing non- investors into becoming investors, given the unattractive returns that you are likely to get over the coming years from cash.
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 larger asset managers, primarily as an Investment Director within Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Investment Committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed.
Investment Quorum is authorised and regulated by the Financial Conduct Authority.