The Lowdown on Markets to 1st May 2015
- Global equity, bond, and currency markets react to signs of a slowdown in US growth.
- In the UK the Q1 GDP figure disappoints as we enter the week of the UK General Election.
- China cuts its reserve requirement ratio by 100 bps for all banks.
- German 10-year government bond yields rise aggressively as the euro strengthens.
- The price of Crude oil posts its strongest monthly gain since April 2009.
- In the commodity markets copper and nickel rise as demand from China picks up.
What does this mean for the markets and asset classes?
“The Global Economy might have entered a soft patch as the US slows down”
It now seems that there are some clear signs of a slowdown within the global economy, indeed, only last week we saw the announcement that the first quarter US GDP figures were significantly lower than market consensus, equally, in the UK the Q1 GDP figure came in much lower than expectations, and in China, concerns over weakening growth and inflation numbers has led to the Peoples Bank of China slashing their reserve requirement ratio by 100 bps for all banks. Even the manufacturing data out of Europe fell slightly in April giving rise to some overall economic uncertainty around the world.
Certainly in the US the recent downturn in economic data has now led to some tangible doubts as to whether the Fed will be able to raise interest rates before September, or indeed, will it be necessary to wait until 2016. This latest uncertainty has provoked some weakness in global equities, bonds and the US dollar over the past few days as leveraged traders have had to take some evasive actions to cover some of their positions. Clearly, the biggest economy in the world, the US, has weakened over the last few weeks, given the recent data, and whilst this could be down to severe winter weather conditions, the jury is likely to remain out until we see some further evidence that this was indeed the case.
In addition to the weaker economic data, we have also been monitoring the Q1 2015 corporate earnings season, which as at the 01st May 2015 has seen around 71.0% per cent of the companies within the S&P 500 Index report earnings above the mean estimate, whilst 46.0% have reported sales above the mean estimate, which is below the 5-year average.
Furthermore, we have seen a wider disbursement of outcomes within sectors and businesses, for example companies such as Apple delivered yet another amazing quarter of earnings, with iPhone sales exceeding market expectations, and the company announcing it intends to return further cash to its shareholders over the coming years. Conversely, we have seen the likes of Nokia and LinkedIn suffer, as their share prices tumbled by 10.0% and 19.0% per cent respectively as reported earnings numbers disappointed the market, along with a weaker guidance outlook. Interestingly enough, with regards to Q2 2015 company guidance statements, just over 40 companies have issued negative EPS whilst 20 have issued a positive outlook.
In general the US reporting season has a similar look to it as of the last quarter, with a number of companies suffering from the impact of slower economic growth, a stronger US dollar, a lower crude oil price, and anxieties over China, given that the latter is a vital market for many US companies and the S&P. Equally, a higher oil price has provided relief to Latin America and the net oil exporters.
Clearly we have seen some recent weakness in the US dollar, given the uncertainties about the Fed’s stance on interest rates, and a 25.0% rally in the price of Brent Crude since the end of March but in both cases this is likely to be short lived, therefore, we still favour those equity markets of large oil consuming countries such as China, Japan, India and the eurozone as well as those robust consumer franchises in the United States, Japan and Europe which should profit from any increase in consumer spending powered by lower food and oil prices.
Unquestionably, global asset prices are still being influenced by aggressive central bank intervention which has led to divergences in regional markets, currencies and commodity prices. Whilst in the US the Federal Reserve Bank’s loose monetary stance and QE program has come to an end, and is now looking to tighten, this is not the case for the central banks of Europe and Japan, given that they will continue to be accommodative stimulating their economies with further QE. Certainly, against this backdrop we are very likely to see further US dollar strength compared to euro and yen weakness.
Equally, recent actions from the Chinese central bank seems to indicate that they are also becoming more concerned over their fading economic growth rate and declining inflation rate, which in turn, has led them to implement two interest rate cuts in three months and reductions in bank reserve requirements. Clearly, this has led to more liquidity in the market and a subsequent rise this year of 40.0% in the Shanghai Composite Index and an 18.0% rally in Hong Kong’s Hang Seng.
And in terms of last week, global equity markets were quite volatile, not helped by dubious signs that the US economy was faltering, this in turn, led to the S&P 500 Index falling by 0.46% whilst in the UK and Europe, the losses were bigger with the FTSE 100 and Euro first 300 indices retreating by 1.20% and 3.43% respectively. Admittedly, the UK’s blue chip index did hit a new all-time high of 7,122.74 before receding later in the week, and for April, we saw the European Index suffer its first monthly fall this year. Similarly in Asia, Japan’s Nikkei 225 Index fell by 2.44%.
However, it was the currency and fixed interest markets that investors saw the most volatility, with the US dollar bulls suffering from a greenback sell off, as the buck hit a two-month low against the euro, before recovering some lost ground by the end of the week. Also the pound came under some pressure amid a weak manufacturing managers’ report for April, and of course doubts surrounding this week’s General Election. Nonetheless, it was bond investors that were somewhat awe-struck as the German 10-year government bond yield rose by more than 30 basis points from its low of 0.05%.
Equally, crude oil prices have posted their strongest monthly gain since April 2009 as US production showed signs of slowing, which in turn, called for some traders to remark that they think the worst of the oil rout might be over. Similarly, copper posted its largest weekly gain since the end of 2012 with nickel rising by 6.0% over the week. This turnaround of fortunes for some metals has emerged from the belief that Chinese demand has been picking up over recent weeks, whilst in the precious metals market gold fell to a six week low despite the weaker 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.