The Lowdown on Markets to 30th January 2015
In this week’s issue
- Sovereign bond yields move lower with equity markets becoming more volatile.
- Concerns remain over Greece and their ability to finance their debt obligations.
- German chancellor, Angela Merkel, rules out any further Greek debt write offs.
- The latest US GDP figures disappoint but the Fed upgrades its assessment of the economy.
- The US dollar loses ground against a basket of currencies as interest rate hikes diminish.
- Storm clouds gather over the global economy as deflationary pressures mount.
What does this mean for the markets and asset classes?
“Sovereign bond yields move lower as risk aversion re-enters the market”
As sovereign bond yields move lower, and equity markets become more volatile, are concerns over eurozone deflation and global growth expectations beginning to take its toll on market confidence? Clearly, if last week’s reactions are anything to go by then the answer is quite conceivably yes.
But surely last week’s announcement by the ECB that they would be buying €60 billion a month of eurozone sovereigns and private sector bonds, is positive news for the markets, especially when you consider that the transaction is open ended, and therefore, the authorities would be expanding their Q€ balance sheet by at least a €1.0 trillion between March 2015 and September 2016.
Surely stock markets like quantitative easing? Given the reactions that we saw when the central banks of the United States, United Kingdom and Japan turned on their printing presses creating a buying spree in equities and bonds which led to a strong rally in their domestic equity markets and yields on their equivalent sovereign bond markets to fall to historic lows.
Regrettably, the eurozone is a different, primarily because you do not have a European centralized government, and therefore events such as the result of last week’s Greek General Election, when the anti-austerity party Syriza, led by Alexis Tspiras, swept into power is of some concern. Indeed, even this week-end we saw the Spanish anti-austerity Party Podemos hold a massive rally in Madrid which throws down a democratic challenge to a Spanish government that is already facing a secessionist movement in wealthy Catalonia. Perceivably, this could become a concern over time given that the Spanish will be holding local elections in the Spring and a General Election at the end of the year.
Clearly, the Greek problem is an issue with doubts now surrounding its capabilities of financing its debt liabilities over the coming months. Certainly, the German chancellor, Angela Merkel, seems to have ruled out any chance of the Greeks cancelling out any of their debt by recently saying “banks and creditors have already made substantial cuts”, however, she still wants the Greeks to remain in the eurozone. Greece still has a debt of around €315 billion, which is about 175% of GDP, despite some creditors writing down part of their debts in a renegotiation in 2012.
Looking outside of the eurozone, the markets have become slightly concerned about the latest US GDP report. This showed that growth had slowed to an annualized pace of 2.6% in the fourth quarter of 2014, well below the 5% expansion seen in the third quarter. Admittedly, we did see a pick-up in consumer spending, due to weaker energy prices, but this was offset by weak business investment which was clearly evident by the failed earnings growth in the final quarter of the year. Surprisingly, at last week’s FOMC meeting the Fed upgraded its assessment of the US economy; and so they must have witnessed some improvements in January. Unfortunately, for many professional investors and market watchers the concern is that the world’s largest economies might be petering on the edge of recession which is keeping them very anxious.
Understandably, angling on the side of caution in uncertain time does make sense but markets have been given three powerful stimulus packages over the last few months, firstly, the unforeseen fall in the price of crude oil, secondly, the long awaited ECB sovereign bond Q€ programme, and thirdly, the likelihood that interest rates in the US and UK will remain at their current levels until early 2016.
This will undoubtedly benefit households, consumers and the stock markets over the coming months but it will take time to get into the financial system. Other important issues of contention are likely to be in the forex market where we have already seen some huge movements in the Swiss franc and euro. To be sure, the probability of some future intervention by the Swiss National Bank to weaken the franc against the euro and dollar is more than probable given its strength and the poor backdrop for Swiss corporate earnings at its current level.
Arguably, last week’s non-committal stance by the Federal Reserve Bank on when US interest rate might rise has left forex dealers feeling that perhaps they have pushed the dollar far enough at the current time, particularly against the euro and sterling. Remarkably, the euro bounced off an 11-year low against the US dollar on Monday and then went on to record its first weekly advance against the green back in six weeks. Obviously, the ECB will be hoping that the single currency weakens further over the coming weeks so as to help European exporters.
Meanwhile, worries about falling inflation saw unexpected monetary easing announcements from Denmark, New Zealand and Singapore, whilst Russia’s central bank cut its interest rate by 2% to 15% in an effort to support its economy from the fall in oil prices and sanctions from the West.
In the commodity markets we are still seeing base metal prices contract as the continued lack of demand takes its toll. Indeed, the Baltic Dry Index has collapsed to its lowest level in almost three decades suffering from falling commodity prices and a surplus of ships. However, one metal that has showed some resolve recently has been the price of gold, with Russia reputedly having bought 20.7 tonnes in December. Russia who has the fifth largest gold reserves in the world might be adding to their position both as a hedge against financial stress and a diversifier against their oil reserves.
Finally, whilst it would appear that we have hit another soft patch in the global economy it will be important for governments, and central bankers, to remain mindful of this, and navigate a careful course around a hazardous financial coastline. Arguably global growth should accelerate throughout 2015 especially in an economic environment where we have lower energy prices and interest rates; admittedly, there are still many risks, given that we are in a deflationary boom, and as we have seen in the past few week’s political uncertainties have increased.
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 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.