The Lowdown on Markets to 6th February 2015
In this week’s issue
- The recovery in the US labour market gains momentum in January with 257,000 new jobs.
- More than 1.0 million US jobs have been created in the past 3 months the most since 1997.
- In Germany bund yields remain steady focusing on the imminent bond buying programme.
- Russia’s stock market hits a near four year high as a Ukrainian summit is planned.
- The price of Brent crude oil records it largest weekly rise in four years.
- Global equity markets nudge higher but remain nervous on deflationary risks.
What does this mean for the markets and asset classes?
“Robust US job numbers drive US Treasury bond yields higher”
In the US we continue to see better wage growth, and employment numbers, giving rise to the belief that their economy still remains on track for recovery. Consequently, can we now expect the Federal Reserve Bank to raise interest rates soon? Clearly, this recent, and more robust, economic data may give the members of the central bank a stronger reasoning for some monetary response in the near future. Unquestionably, if they were able to raise interest rates this year and throughout 2016 then it would certainly help protect them from any downturn in 2017 and beyond. Admittedly, the low core US inflation data and worries about the eurozone might actually be enough of a reason for the Fed to hold off raising interest rates until September.
Certainly, Fridays US non-farm payroll numbers surprised Wall Street coming in at 257,000 new jobs created last month, making it more than one million over the past three months, and the most since 1997.This data coupled with some surprising corporate earnings announcements is pleasing, even if, core inflation remains subdued. In terms of market response, we saw the dollar index rise by around 1 per cent, whilst 10-year US Treasury bond yields rose sharply, along with five-year paper. However, US equities showed some reluctance to gain any real momentum as they became unsure of what the next move might be from the Fed.
Certainly over the next few months we might get a further indication of how robust the US economy really is given that sometimes there is a time lag between events such as the recent job losses in the energy sector and a strong US dollar, both of which in time could cast a shadow over recent data.
Admittedly, we still need to see what the consumer decides to do with their extra money from the fall in the energy prices, will they spend this unexpected hand-out, or given the likelihood of higher interest rates decide to save it.
In Europe German bund yields held steady on the back of the US jobs report, focusing more on the impending eurozone bond buying programme by the European Central Bank, and National Central Banks. Whilst there are still some sceptics in the market place asking whether this bold move will be sufficient to make a real difference to their weakening economy, we believe that the impact of lower rates and a weaker euro will boost eurozone exports helping both businesses and ultimately the Eurozone economy.
Clearly, the backdrop of low or negative interest rates, and bond yields, in the eurozone is likely to encourage investors to buy riskier asset classes, as they try to find investment opportunities that will provide them with an acceptable return from their capital. This in turn, might drive European share prices up especially if many of the exporting companies begin to benefit from further weakness in the single currency.
In eastern Europe Russia’s main stock market index has risen to a near four-year high as a Ukraine peace deal was drawn up by Germany and France. Whilst German Chancellor Angela Merkel said “it is still unclear if the plan would succeed it was definitely worth trying”. Hopefully, they will be able to secure a ceasefire deal elevating concerns about the US giving weapons to the Ukrainians which would undoubtedly put further stress on East versus West relations and possibly divide NATO.
Equally in the commodities market we saw the price of Brent crude oil record its largest weekly rise in four years as signs appear that oil companies are drilling less with many stating that they will be cutting exploration and spending this year. The price of crude oil has fallen by 50 per cent since mid-June of last year amid strong supply growth from US oil shale fields and sustained OPEC output along with weaker global demand. Therefore, it will be fascinating to see whether the current market price of US$58.50 a barrel can be upheld given that commodity analysts seem to have a very wide trading range for oil over the next 12 months of US$40 to US$70 a barrel.
Arguably we are still in a delicate phase in terms of the global economic recovery with stock markets remaining gloomy about the outlook, unquestionably we do face many structural headwinds over the coming months but in our view the three most important issues that could be instrumental in their direction are;
- The decoupling of the four most powerful central banks in the world with the Federal Reserve Bank and Bank of England getting ever closer to raising interest rates for the first time in many years whilst the European Central Bank and Bank of Japan will increase their quantitative easing programmes by buying sovereign bonds.
- The fall in the crude oil prices which is likely to help boost global growth and offset some of the negative reassessment factors such as Russia, China, Japan and the eurozone.
- Further instability in the forex markets leading to a possible currency war given that we have already seen the likes of the Swiss National Bank withdraw its peg to the euro, the collapse of the Russian rouble and the strength of the US dollar.
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.