World Markets at a Glance
In this week’s issue
- Athens resorts to some extraordinary tactics by bundling their debt repayments for June.
- Whilst Greece has yet to officially default they are getting ever closer.
- Last month’s US non-farm payroll numbers surprise on the upside igniting talk of rate hikes.
- Government bond markets have a vexing week as yields across the curve back up.
- By the same token we saw most equity markets suffer from last week’s Greek tragedy.
- However equities still remain the asset class of choice but volatility is likely to increase.
What does this mean for the markets and asset classes?
“Government bonds experience a volatile week selling off across the curve”
It was a vexing week for the government bond markets as they experienced a sell off across the yield curve. Anxieties surrounding Athens requesting a deferral, or a bundling of their debt repayments to the end of June clearly spooked the markets.
Equally, Friday’s announcement that last month’s US non-farm payroll numbers were in excess of the markets expectations did see Treasury bond yields back up across the yield curve. Certainly, the creation of a further 280,000 additional jobs, plus an upward revision to the previous two months numbers, did come as a surprise, also it would appear that there has been a pick-up recently in the annual rate of earnings growth, indeed, it has now reached its highest level in nearly two years.
Certainly, this latest US economic data would seem to indicate that the first quarter’s weakness that we saw was indeed temporary and that the US labour market has possibly turned a corner. This will undoubtedly bring the US interest rate hike debate back into the forefront of market strategists and investors thinking, indeed, Fed fund futures are already indicating the likelihood of a September rate hike raising its predictions from 46 per cent to 54 per cent.
Now returning to Athens it seems fairly clear that the Greeks are resorting to some extraordinary tactics to avoid an outright default on their debt and whilst no nation has officially defaulted on its obligations in the post Bretton Woods era the Greeks are getting close and could still end up joining an embarrassing list of worn torn nations and international outcasts who have failed to repay their debts back on time.
Regrettably, the Greeks are now facing a €1.5 billion payment to the IMF by the end of June, by way of bundling the outstanding amounts together; however, this is just the beginning of their problems as they actually owe the IMF €9.7 billion in total by the end of this year. Understandably, by bundling up their payments the Greeks have effectively avoided triggering an immediate default, indeed, they have actually bought themselves a further 30 days of grace to come up with the cash but the reality still remains that they must make a repayment by the end of this month or officially default.
Unfortunately, this will not be the end of the “Greek tragedy” as they still owe the European Central Bank €6.6 billion in July and August; actually, in reality the “Debt Mountain” and repayments to the IMF and ECB are likely to continue for years to come, or indeed, never.
Returning to the question surrounding the bond markets we have clearly seen a turnaround of fortunes over the past few weeks, with the likes of the German 10-year government bond yield moving from 0.05% in April to Friday’s close of 0.84%, after touching 0.99% earlier in the week.
Likewise, other sovereign bond markets have experienced a similar fate, in fact, we have seen an estimated drop in bond values of around US$625 billion in recent weeks, and to put that into some perspective, if an bond investor had invested into the benchmark 10-year German government bond in mid-April they would have now lost 7 per cent of their capital, or indeed, fourteen times the total return they will earn over 10 years. This is not just an apprehensive time for pricing and trading, it’s also a time of concern for liquidity, especially when the markets experience a bond tantrum.
Intensified volatility in bond markets is likely to be something we will need to tolerate over the near term, given that a Greek default is still plausible, that interest rates will soon begin to rise in the US, and that the ECB will continue to be accommodative with their monetary policy and aggressive with their quantitative easing programme. Similarly, this will have ramifications for other asset classes such as currencies, and in particular the euro, which is likely to remain sensitive to all of the above.
By the same token, we did see the Greek equity market tumble by 5.0 per cent over the week, as implied borrowing costs shot up, whilst the Eurofirst 300 and FTSE 100 Indices coped a little better falling by just 2.7 per cent and 2.6 per cent respectively. Surprisingly, in the developed markets it was the New York and Tokyo that seemed to handle the volatility of the week the best with just marginal falls of 0.69 and 0.50 per cent recorded on the S&P 500 and Nikkei 225 indices.
Whilst we are on the subject of equity markets it is worth mentioning that the Shanghai Composite Index has rallied a further 8 per cent last week which obviously has created some concerns that the market has already entered bubble territory. Unquestionably, the Greek situation will continue to weigh heavily on market sentiment; however, if the world’s second largest economy were to suffer
a correction then this would certainly have consequences for the rest of the world.
In terms of the commodity markets the crude oil price had a roller coaster ride, both prior and after, OPEC agreed to stick to its current strategy of pumping as much oil as possible to squeeze the high cost producers. This strategy is likely to see a glut of oil in the market, putting downward pressure on prices, indeed, Brent crude oil saw its price fall to below US$61.0 a barrel before rallying back to close out the week at just under US$62.0. In precious metals, the gold price retreated by US$19.0 over the week reacting negatively to the stronger dollar and the US jobs number.
And so looking across the main markets for equities, bonds and foreign exchange, there would still seem to be an investor appetite for taking on risk, even if there are some discouraging events and issues currently happening around the world. Regrettably, over the past few years central bankers have had to make some unconventional decisions to support a weakened financial system and this has left global investors continually chasing markets for better returns than are achievable in holding cash, or even bonds. Undeniably, equities still look better value than bonds on a valuation basis, but saying that, global investors really now need to be more selective as to their choice of geographical regions, sectors and the companies that they invest in, especially knowing that the summer months can sometimes be unpredictable and volatile.
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.