The Lowdown on Markets to 27th March 2015
- Global stock markets show some signs of quarter end jitters.
- Europe and Japan out-perform the US over the first 12 weeks of the year.
- Fed chair Jane Yellen indicates that interest rates will rise latter this year.
- In the forex market the euro falls back as the dollar regains its momentum.
- A concern about a supply glut pushes the price for iron ore lower.
- As we enter the second quarter of the year a correction cannot be ruled out.
What does this mean for the markets and asset classes?
“Lingering uncertainties from the Fed is slowly worrying Wall Street”
Whilst some stock markets have shown a little resilience it is becoming more apparent that the lingering uncertainties surrounding the Federal Reserve Banks future interest rate policy is slowly disheartening investor sentiment on Wall Street, Indeed, the lacklustre performances from both the Dow Jones and S&P 500 indices over the first quarter of this year has shown that momentum and investor’s appetite for US stocks might be fading.
Conversely, the European and Japanese stock markets have out-performed Wall Street over the past 12 weeks as investors have flocked to those markets that continue to have loose monetary policies and weak currencies. Indeed, whilst recent Fed statements have been scrutinised over the usage of words such as “patient”, the only commentary that have been influential for market sentiment has come from the European Central Bank and the deployment of “quantitative easing”.
That said Wall Street has still seen some support over the quarter as investors have been prepared to “buy on the dips” and companies have continued to deploy there buy back strategies. However, we are now entering an important period, the US corporate earnings season, which is likely to throw up some surprises, especially, from the effects of a strengthening US dollar. This in turn, is likely to lead to some close inspection of the earnings numbers and what company management might be saying about trading conditions and guidance over the forthcoming quarters.
Arguably, the tradeoff between equities on Wall Street for those in Frankfurt, Tokyo and indeed London has left many markets trading at their all-time highs, or at levels not seen for a very long time, which in turn, leaves very little room for disappointments, therefore, the recent frustrations surrounding US Fed statements, US economic data, and geo-political instabilities in the Middle East could easily ignite a meaningful sell off in riskier asset classes.
Admittedly, Janet Yellen’s recent speech saying that “the Fed was giving serious consideration to lifting rates later this year”, and “that rate rises will happen only gradually”, did have a calming effect on markets, however, financials, technology and biotech stocks did lead the S&P 500 Index lower over the five day trading period. Likewise, we did experience a softening of share prices in London and Tokyo but this was for differing reasons, in the UK, it was reported that inflation has fallen to zero, whilst poor economic data took its toll on the Japanese stock market.
Clearly, some markets are reacting positively to central bankers that are keeping their interest rates lower for longer, and their currencies weak, given that this can be very beneficial for those exporters within these countries, whilst those that have higher interest rates, and stronger currencies, are likely to suffer from the opposite effect.
Alternately there are those countries such as Denmark, Sweden and Switzerland that are running with negative interest rates as they desperately try to prevent periods of deflation, which in turn, could derail any hope of their economic recovery. Likewise, other European countries that have suffered the fate of deflation over the past twelve months have been Bulgaria, Greece, Cyprus, Portugal, Spain, Slovakia and Croatia.
Conversely, the United States will begin to tighten sometime this year which could have important consequences for their currency, stock market and investors. Unquestionably, a stronger dollar will act as a headwind for emerging markets, commodities, and any US corporations that have extensive overseas earnings.
Likewise, investors in the UK who have globally diversified portfolios are likely to experience further short-term volatility from their currency exposure, unless of course they have applied some hedging strategies, particularly against the yen and euro, given that the BoJ and ECB will keep their interest rates and bond yields very low for some time to come. In terms of the BoE, they likely to follow the US, and raise interest rates sometime after the General Election.
Undoubtedly, as we come to the end of the first quarter of the year, and enter the seventh year of the bull market, the prospect for a “correction” or a “flash crash” does seem distinctly possibility, therefore, with this in mind, investors need to be mindful but it could also give those longer-term investors another opportunity to “buy on the dips”.
Arguably, the world has lived on “cheap money” for a sometime and whilst it would appear that we now live in a world of lower global economic growth, inflation, and interest rates, we do expect the Federal Reserve Bank and the Bank of England to begin tightening very soon, nonetheless, the “new normal” will continue to be low.
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.