World Markets at a Glance
The Lowdown on Markets to 29th May 2015
In this week’s issue
- Greece indicates that it will not default on its forthcoming loan repayment to the IMF.
- Gloomier economic news out of the United States takes its toll on global equity markets.
- In Asia the Japanese Nikkei 225 Index records its longest winning streak since 1988.
- The Chinese market has a roller coaster week retreating by 10% and then recovering.
- In Britain the CBI has up graded its UK growth forecasts to 2.7% for 2015.
- The markets and investors remain nervous in the wake of uncertainty surrounding Greece
What does this mean for the markets and asset classes?
“Greece says it will not default on this week’s loan repayment to the IMF”
The dichotomy of whether Greece will remain in the European Union or exit is still a storm cloud that hovers over Europe, and global stock markets. Clearly, last week’s gloomy economic releases from the United States and the lingering doubts as to whether the Greeks have the capabilities to renegotiate and repay their debt liabilities is a challenge and continues to weigh heavily on western markets.
Understandably, nerves are running high as we slowly edge towards the 05th June when Greece’s cash strapped government need to make a repayment of debt back to the International Monetary Fund. Nevertheless, on Friday Greece’s economic minister has indicated that the country will pay back its €305 million debt back on time, even if some Greek ministers have voiced an opinion that the debt cannot be met unless they secure a deal to release the outstanding €7.2 billion of loans that Greece belief they are entitled to under their current bailout programme.
Unquestionably, this Greek tragedy now needs to be addressed and a resolution found given that the Greeks owe around €320 billion, mainly to other Euro area governments, and the European Central Bank. Furthermore, looking at the calendar of interest and principal payment dates over the remainder of the year the problem is not going to go away until a sensible resolve can be found.
Arguably, against this a backdrop of rising political uncertainties, and edgy debt talks, it has led to the Greek people withdrawing a further €5.6 billion out of their accounts last month, indeed, the ECB have even confirmed that customers have continued to withdraw funds out of the Greek banks in favour of putting their money under their beds or transferring it to other overseas institutions which clearly point to financial panic amongst the Greek general public.
Although all of this must sound rather gloomy the consensus view is that Greece will remain in the Eurozone and that there will be an agreed deal between Greece and the European Union. However, Athens needs to accept that reforms must be met to acquire further cash whilst the EU must be bold and provide some radical changes to their proposals. Alternately, perhaps to help the situation the Greek government could consider other options, such as encouraging privatisations, whereby they could attract more foreign investment, or orchestrate business with the Chinese, given their vast sums of capital and an appetite for building profitable companies.
Now looking across the Atlantic the news that the US commerce department had revised down its estimated first quarter GDP growth number from 0.2 per cent to minus 0.7 per cent was of no real surprise, but the fall in the Chicago purchasing managers index, a gauge of business conditions in the US Midwest, from 52.3 to 46.2 in May was a surprise which the market disliked. Equally, whilst there was some better news from the University of Michigan given that they revised up their numbers the US data remains very mixed.
Clearly, these numbers are going to do very little to improve the outlook and supposed rebound for the second quarter, which could leave the Fed with a dilemma regarding the first initial interest rate hike. Unfortunately, this US recovery is patchy and has been built on cheap money and labour, plus productivity has been poor. Regrettably, this is now becoming a real issue for the Fed as they really need to begin tightening before the next crisis hits otherwise their monetary armory will be shallow.
If we now turn to Asia, there were two noticeable events over the week; firstly, in Japan the Nikkei 225 Index recorded its 11th straight trading day rise, its longest run of gains since early 1988, and in China global investors had to endure a roller coaster ride as the Shanghai Composite Index retreated by 10% over a two trading session before recovering to end the week marginally down. This volatility was mainly put down to tighter lending restrictions at some brokerage houses, however, others felt that the selloff might be down to other factors such as increased selling by major shareholders such as China’s sovereign wealth fund.
Whatever the reasoning might be, foreign investors have been aggressively buying Chinese stocks for most of this year, which in turn, has seen some US$4.6 billion of overseas funds entering the market and propelling the Shanghai Composite Index upwards to become the best performing stock market this year.
Certainly, the equity and bond markets seem to be having some difficulty in finding a way to obtain any real momentum at the current time given the Greek headwind in Europe and the uncertainty surrounding the timing for the first interest rate hike in the US. Whether indeed there are bubbles appearing in certain markets such as China, or indeed, are bond markets now uninvestable as yields remain at historic lows ahead of a pickup in inflation is debatable. However, what is now evident in the market place is that the rise in prices for many of the riskier asset classes over years of stimulus and accommodative monetary policy has led to fears about a possible steep market correction.
Indeed, in the UK this fear has led to an increase in money inflows into absolute return funds, which in turn, has seen the asset class record its strongest monthly money inflows on record. This in itself would suggest that there is a growing concern amongst some investors that an imminent reversal of fortunes within the market is not far away. Uncertainty, has always been the markets worst enemy, therefore with the likelihood of further trouble brewing around Greece and the Fed giving off mixed signals around the timing for monetary tightening we might experience a pick up in volatility over the summer months.
On a more positive note the CBI has raised its UK growth forecast to 2.7% for 2015 accrediting a combination of low inflation and improvements in employment for the increase. Also the services sector which ranges from restaurants and plumbing to finance and banking appears to be a stand out sector with much of this improvement being attributed to the fall in the oil price. The CBI went on to say that they thought that consumer price inflation would remain below 1% for the rest of the year with crude oil prices trading around US$65.0 a barrel and interest rates to rise in early 2016.
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.