The Lowdown on Markets to 13th March 2015
- Global investors begin to switch their allegiance from the US to the eurozone.
- Wall Street suffers its third successive week of losses as anxiety mounts on rate hikes.
- In the forex market the US dollar continues to strengthen against the euro.
- The continuation of the dollar rally is harmful for emerging markets and commodities.
- Commodity prices continue to weaken from the threat of a stronger dollar and higher rates.
- Equities still look more favourable than bonds given the current economic backdrop.
What does this mean for the markets and asset classes?
“Wall Street begins to suffer from the ECB’s long awaited QE programme”
It would appear that some rotational strategy is at work as global investors begin to switch their allegiance from the US to the eurozone, indeed, so far this year around US$35 billion has flowed back into European funds, beating the previous record set in 2014, whilst a similar amount has flowed out of Wall Street. This turnaround of fortunes for the European equity markets has certainly come on the back of the promised quantitative easing programme from the European Central Bank.
Unquestionably, the recent announcement from the ECB president, Mario Draghi, that the central bank were going to press ahead with their proposed €1.1 trillion QE plan has had an instantaneous effect on the European bond and equity markets, whilst stateside, a weakening earnings outlook, stronger US dollar, and the Federal Reserve Banks comments on the likelihood of monetary policy tightening, has led to some nervousness on Wall Street and a third successive week of losses.
Similarly, this created some nervousness in the forex and commodity markets as the dollar resumed its upward momentum, which in turn, saw the euro, yen and sterling retreat against the worlds reserve currency, indeed, sterling has now hit a five-year low against the green back. Likewise, a strengthening US dollar does not bode well for certain emerging market currencies, such as the Mexican peso and Turkish lira that have already suffered from dollar strength.
Understandably, any further strengthening of the dollar will continually take its toll on those asset classes such as commodities, emerging markets and precious metals such as gold, and eventually the US stock market, given that many US exporting companies will begin to suffer from currency impact on corporate balance sheets.
Given that the US dollar bull market is underway, and has much further to go; it is likely that it will hit parity against the euro this year, and then beyond in 2016. Admittedly, this would be very good news for the European exporters making them more competitive in the global arena. Equally, if the yen were to weaken further against the dollar a similar outcome would be expected.
Admittedly, the latest rise in the dollar has come on the back of some weaker US economic data, a fall in US producer prices, weaker February retail sales numbers, and a dip in the headline Producer Price Index, subsequently, it is possible that the Fed might delays its first interest rate hike in many years to much later in the year. However, they are likely to become more hawkish in their future statements, starting this week at their 2 day FOMC meeting.
In terms of the UK, sterling’s recent performance against the euro does have ramifications, given that the eurozone is the UK’s largest trading partner. Arguably, the most significant event in the UK over coming months will be the result of the UK’s General Election on the 07th May 2015, and given the uncertainty surrounding the result of this event we are likely to see further volatility around the currency.
None-the-less it is becoming much clearer in market place that the “elephant in the room” is the fear surrounding higher interest rates in the US, and the continual rise of the US dollar, and whilst this has created some doubt in investor’s minds there does appear to have been a “buy on the dips” mentality in recent times. Equally, it has been apparent that investors have focused their attentions towards those countries that still have quantitative easing programmes in place, hence the recent rise in the markets of the Eurozone and Japan. Equally, they have become more wary on those countries like the US that are moving ever closer to a period of monetary tightening.
Clearly, the outlook for global growth appears modest given that any advancement in the developed economies seems to be offset by weaker growth in the developing. Unquestionably, we are entering the last 12 to 18 months of this economic cycle and as I mentioned in last week’s report we are now in the seventh year of this current bull market.
Obviously, the current fall in crude oil prices should not be underestimated and will be a boost for certain countries’ economies, and of course the consumer, however, on the flip side the continued price weakness from other commodities, such as copper and iron ore, clearly signifies the extent of the economic slowdown in regions such as the developing world.
Equally, currency devaluations from the likes of the eurozone and Japan will act as a market positive whilst a rising US dollar will impede the emerging markets and commodities. In terms of central bank policy the focus will now switch back from the eurozone to the US, and this week’s important FOMC meeting. Arguably, another strong employment report for February should see the committee drop the word “patient” from their statement allowing them more flexibility towards rate hikes; however, it is also likely that they will show some concerned over other issues within the US economy and the current events outside of the United States.
Obviously, as global investors we continue to look for investment opportunities, therefore, against the current backdrop of modest global growth, cheaper oil prices, favourable inflation, continued central bank support, and a rising US dollar, we favour those sectors benefitting from a pick-up in consumer spending. Equally, healthcare and financials still remain attractive for differing reasons, whilst the recent sell off in the energy sector might offer long-term investors a rare opportunity.
In terms global regions, Europe and Japan will continue to benefit from weaker currencies, whilst in the developing markets, India should still benefit from further structural reforms and the weaker oil price.
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.
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