The Lowdown on Markets to 13th February 2015
In this week’s issue
- Global equity markets continue to rise on positive news flow.
- A ceasefire agreement between Russia and the Ukraine helps market sentiment.
- Wall Street hits another record high as Germany’s Xetra Dax breaches 11,000.
- Treasury yields move higher on robust job numbers, wages growth and economic data.
- The price of Brent crude oil is back above US$60.00 a barrel as supplies decline.
- Global equity markets remain buoyant as investors look to benefit from bullish momentum.
What does this mean for the markets and asset classes?
“The equity bulls push markets higher on sentiment turnaround”
Stock markets react positively over the week as news filtered through that the leaders of Russia, Ukraine, Germany and France had reached an agreement on a ceasefire and that it would begin on the 15th February 2015. The deal included weapon withdrawals and prisoner exchanges; however, some important issues still remain unresolved.
Also in Europe the news that the German economy had grown by 0.7 per cent in the fourth quarter of 2014, significantly more than was forecast, was taken positively by the German market, which saw the Xetra Dax Index rise above the 11,000 mark for the first time before paring back some of its gains. Similarly, there was some better growth data announced from the wider Eurozone showing fourth quarter expansion of 0.3 per cent beating market consensus.
Clearly this optimism and better-than-expected economic data out of the Eurozone is very timely given the uncertainties still surrounding the Greek situation. Admittedly, the “Grexit” threat will continue to overshadow events in the Eurozone as we move ever near to them needing to repay some of their debt.
On Wall Street we saw the S&P 500 Index hit another record high helped by the ceasefire agreement in the Ukraine, growth numbers in the Eurozone, and US fourth quarter earnings numbers that seem to be providing the market with some positive relief and sentiment towards the recovery in the US economy. That said, it would be wise to keep a watchful eye on future earnings expectations given that the P/E ratio on the S&P 500 Index has now reached its highest level since 2004 and therefore the market might not be too sympathetic to any of those companies that talk about reductions in their forward guidance numbers or disappointing announcements over the coming quarters.
Equally, the market is already focusing upon the probability of interest rate hikes in the not too distant future as Fed chair, Janet Yellen, prepares to raise rates for the first time since 2006. Whilst the timing of this event still seems debatable this week’s move in the US 10-year treasury yield from 1.64 per cent to 2.00 per cent gives the impression that the bond market is anticipating a move by the Fed sometime soon. Admittedly, interest rates will remain low on a historical average basis but any move upwards it is likely to create further volatility in equity and bond markets.
In terms of commodities we are still seeing huge moves in the price of Brent crude oil. Since late January 2015 we have seen the price bottom out at US46.00 a barrel and then rise to its current level of US$61.00. Whilst this recent rise of over 30 per cent appears to be down to short covering, and less market sentiment, further price instability cannot be ruled out.
Unquestionably, this lower macro trading range for oil is very good news for the global economy; and for industries such as Airlines and transportation companies. Indeed, recent statements from the likes of Colgate-Palmolive to Alcoa have re-affirmed that even there businesses are benefiting from cheaper energy prices. Regrettably, however, the collapse in the oil price has also meant that in some industries such as oil services we have seen aggressive cut backs in drilling. Companies such as Apache Corp, a leading oil shale operator, have already announced that it would be cutting its capital expenditure; similarly, BP, Statoil and Total have also announced spending cuts for 2015. This has led to job losses and concerns over future profitability and possible dividend cuts.
In the FX market central bank, policy continues to dictate market direction, and last week it was the turn of Sweden’s Riksbank to cut its main interest rate into negative territory and announce that it would buy Swedish krona 10 billion of domestic government bonds. This monetary action by the Swedish authorities follows in the footsteps of the ECB, Denmark and Switzerland whom have all imposed a negative interest rate policy. Clearly, the Riksbank is hopeful that it can import inflation by having a weaker Swedish krona, but unfortunately the “negative interest rate currency war” is well underway across Europe which will make it increasingly more difficult.
Elsewhere, sterling strengthened after BoE governor, Mark Carney, put a positive swing on his latest quarterly report whilst the euro held firm against the US dollar helped by the economic data out of Germany and the wider eurozone. Even hopes of a ceasefire between Russia and the Ukraine helped the rouble.
And so it would still appear that investor’s appetite for risk still remains fairly intact, even if at times tested. Certainly whilst bond yields and interest rates remain at these low levels then equity markets will continue to offer a better option regardless of what you might be thinking about valuations, it’s rather like playing musical chairs “keep buying until the music stops” then it will be time to review.
Peter Lowman Chief Investment Officer