The Lowdown on Markets to 8th May 2015
- Stock markets rally on the back of a Conservative win and goldilocks US jobs data.
- In the bond markets US Treasury yields fall on jobs data whilst German Bund yields rise.
- The Chinese central bank cuts rates for the third time in six months on growth worries.
- In the commodity markets copper, iron ore and crude oil prices move higher.
- As the dollar inched higher on the US jobs data it was held back by the UK election result.
- A week of positive surprises helped to stabilize recent market sentiment.
What does this mean for the markets and asset classes?
“Stock Markets rally on surprise results on both sides of the Atlantic”
Over the past few months concerns have been mounting over the outcome of the UK General Election and the uncertainties surrounding the US economy and Europe. However, in just over 24 hours the UK political pundits and global economic strategists were having to realign their thoughts as the Conservative Party secured a majority win in the UK election, whilst in the United States, last month’s employment numbers rebounded as the unemployment rate fell to its lowest level since May 2008. Even in Europe we saw calmer conditions as the equity markets rallied whilst bond yields continued to rise as the smart money shifted out of Bunds as the deflationary story began to fade.
And so in terms of the UK, it is clearly good news that we have a single party majority government, rather than a further period of a coalition government, given how the other parties faired. Plainly, many of the pollsters and forecasters were wrong about the outcome, whilst it would appear that the gambling fraternity was better predictors as bookmakers announced some heavy losses on the outcome with many betting on an overall majority for the Tories.
Certainly, once the humiliation of the defeat was known by the bewildered leaders of the Labour Party, the Liberal Democrats, and UKIP, their resignations followed in quick succession leaving all three parties is disarray. Unquestionably, the biggest losers from an individual party perspective was the devastating loss of so many seats, and leading MP’s, from the Lib Dem Party, which is likely to keep them in the political wilderness for many years to come, if not decades. Likewise, the Labour Party will need a new leader with some special qualities to make them a political force to take on the Conservatives in future elections.
Surprisingly after all the campaigning and a notion that the country might vote for change, middle England actually voted for the party that they thought was best equipped to continue with the work of getting this countries economy “back on its feet” and not “back to the dark ages”. Clearly the world has changed over the past 6 or 7 years and as we continue to recover from the fall out of the financial, crisis, growth and prosperity, jobs and a stable economy is the priority for governments and central bankers, not uncertainty, instability, and poor leadership.
Understandably, the UK stock market was in a buoyant mood in the first few hours of trading on Friday morning, relieved that the country had voted wisely for a majority government, rather than the unenviable task of the political parties forming yet another coalition government. Certainly, most observers had expected the latter, therefore, the relief of the outcome saw more than £40 billion added to the value of Britain’s biggest companies, and much activity in the FTSE 250, the index of mid-cap companies that originate a large proportion of their business from the UK.
In the United States, Fridays US payroll numbers saw last month’s figures rise by 223,000, with the unemployment rate falling to its lowest level since May 2008. This latest news seems to indicate that some renewed momentum has entered the US economy, after some previous disappointments. Yes we have seen US growth in the first three months of 2015 contract, blamable on adverse weather conditions, a stronger US dollar, and weaker oil industry investment, however, job creation over the past 12 months has been relatively robust, adding some 3 million new jobs, admittedly, wage inflation has been lacklustre and the Fed will be mindful of this when anticipating the timing for an interest rate hike.
Whilst this latest data will undoubtedly create some debate as to the timing of monetary tightening it is still unlikely that the Fed will make their move much before September, given that the summer months have in the past been prone to generate some confusing statistics, but for what it is worth, Friday’s data, did generate a rally in the US Treasury market as investors took the view that the Fed would not raise interest rates until the autumn.
Turning to Europe, the outcome of Thursdays UK General Election and Friday’s “goldilocks” US non-farm pay roll numbers helped to revive many European markets with the likes of the FTSE Eurofirst 300 and Germany’s Xetra Dax index both seeing rises of more than 2.5%. Other factors in play was the retreat of the euro, which helped push the prices of European exporters higher, the receding of deflationary worries, with the possible return of some inflation in the second half of the year, and the continued intervention of central bank policy from the ECB.
Admittedly, we have seen some notable outflows from European equity and bond funds of late as investors became a little anxious over the recent strength of crude oil prices and a strengthening euro. Arguably, the European markets have experienced a strong recovery over recent months, with the Dax hitting a record peak in April, therefore, it seems natural that some investors will from time to time crystalize some gains.
Remember, the ECB will still remain accommodative, continually supplying the market with monthly liquidity, depressing bond yields and keeping interest rates low, therefore, if the euro does weaken further over time, and the oil price stabilizes, European equity markets should still do very well and generate an acceptable return for global investors, particularly if in the second half of this year we see so inflationary pressures return.
Equally, China’s central bank is becoming much more pro-active against their slowing economy by cutting its benchmark rate by a further 0.25 basis points over the week-end. This is the third time in six months that the authorities have cut rates. The central bank said in its statement that “China’s economy was still facing relatively big downward pressure”, which then led to many economists predicting that further rate cuts were to come. This fiscal action is likely to be seen by the market as accommodative, therefore, it would not be surprising to see the Shanghai Composite Index move higher over the weeks, followed by the Hang Seng in Hong Kong.
This brings us neatly onto commodity prices where we have seen a turnaround in fortunes for the likes of copper and iron ore pricing, which have rebounded on the back of a rising crude oil prices, and the weaker US dollar. This recent move is quite interesting given that China’s economy is clearly slowing down and that global investors are anticipating that the Chinese authorities will respond aggressively with additional stimulus. Admittedly, a reduction in stocks for some of the basic metals, and buying by Chinese steel mills ahead of their peak summer demand period, has facilitated a push higher in many commodity prices, bouncing off their recent five month lows.
Arguably, this could be a false dawn for this asset class given that higher prices will require demand, and therefore better global growth, which there is still a great deal of debate around, none-the-less for those early investors that have long term time horizons, and risk appetites, commodities could once again be an interesting asset class over time.
And so after a strange week that saw the Conservatives, against all the odds, be reelected in the UK General Election, a US jobs report still indicating that the US economic recovery remains on track, be it modest, that Europe’s deflationary concerns are all but over, the Chinese authorities cutting rates for the third time in six months, and a commodities market that seems to be showing some signs of life after years in the wilderness. We even had the Fed chair, Janet Yellen, warning of the risks in the stock and bond markets under the current environment of low interest rates.
Quite clearly we have faced some unprecedented challenges over the past few years and through much central bank intervention, and structural change, all asset classes have seen an increase in volatility, with some asset bubbles being formed. This is quite understandable after a six year bull market, but the question now is “can the leading governments and central banks around the world steer a steady course to project growth and prosperity without creating panic, or uncertainty, that tends to lead to those unhelpful flash crashes”.
Peter Lowman Chief Investment Officer