World Markets at a Glance
In this week’s issue
- Global markets continue to show signs of nervousness over the fears surrounding Grexit.
- A continuation of strengthening US economic data would suggest that the Fed might tighten.
- The UK chancellor signals his willingness to start selling off the government stake in RBS.
- China’s stock market powers ahead as the PBOC continue with its loose monetary policy.
- The Governor of the Bank of Japan, Haruhiko Kuroda, is happy with the level of the yen.
- Equity and bond tantrums are likely to persist over the coming few weeks as events unfold.
What does this mean for the markets and asset classes?
“Fears grow over a Greek default whilst signs of US recovery remain intact”
Global equity, bond and currency markets continued to show signs of nervousness over the week as fears began to grow that the Greeks would finally end up defaulting on their debt obligations at the end of this month, indeed, Thursday’s withdrawal in Athens of the International Monetary Fund’s negotiating team from the “cash for reforms” talks, does not bode well for a positive outcome. Also the more forceful stance that has come out of the European Union leadership has certainly led to a sharp pullback in investor sentiment towards both European equities and the peripheral eurozone government bond markets.
Clearly, the deadlock between Greece and its creditors over the reforms is very concerning, and with senior European Union officials supposedly discussing for the first time the possibility of a default in June has really spooked market sentiment, creating both fear, and uncertainty, over the outlook for Greece and its possible bankruptcy.
Unquestionably as we enter the next couple of weeks the stakes are going to remain very high given that there is little wriggle room left for the International Monetary Fund to move, and of course with the Greek Prime Minister Alexi Tsipras clashing with its creditors over the proposed reforms for aid it would seem that any further progress is becoming muted. This is not to say that both sides will not continue to be “fully engaged” in trying to find a solution before the €1.5 billion debt repayment becomes due on the 30th June 2015.
Indeed, there was even a rumor earlier on in the week that the Germans might be ready to offer the Greeks some form of staggered transactional deal whereby they would release more aid for every reform implemented by Athens, however, this was subsequently denied by a spokesman from the German government. Quite clearly all sides are now playing a bluffing game with the Greeks hoping that the US might apply some pressure on the EU, or that the German chancellor, Angela Merkel, might try and broker a last minute deal given that she might not want to be known in the future as the German leader who was responsible for the beginning of the break-up of the single currency.
Whilst many uncertainties seem to be clouding the skies of Europe, the outlook in the United States is far more positive. Certainly, a string of recent economic data has shown that “Uncle Sam” is clearly on the mend, which has bolstered expectations that the Federal Reserve Bank might raise interest rates over the coming months. US producer prices in May saw their largest gain in nearly two years, with a similar story being shown from retail sales. Likewise, a week ago we saw some robust gains in the employment numbers, all of which has placed some pressure on Fed chair, Janet Yellen, to begin US monetary tightening.
Likewise in the UK, the economy has grown faster than previously thought, according to estimates from the Office for National Statistics. Apparently, the construction sector has had a better start to 2015 than was first thought, and with expectations that building activity throughout the rest of the year will be buoyant should continue to act as a tailwind for the economy. On the flipside, further austerity, a stronger pound, and the prospects of rising interest rates will probably act as a headwind over the second half of the year. Arguably, whilst the UK economy might have turned for the better, caution should still prevail, given that “one swallow doesn’t make a summer”.
In addition to the ONS statement came the chancellor, George Osborne’s, Mansion House speech where he signaled his readiness to start selling off the governments Royal Bank of Scotland stake, seven years after it was rescued from collapse by the UK taxpayer. He then went on to say that he thought it was time to sell off part of the 79 per cent stake even though the state has actually paid more for the shares than they are currently worth in the market, indeed, some £13 billion less.
Also the UK chancellor appeared to support a move by the Governor of the Bank of England, Mark Carney, to impose tougher punishments on bankers who rig markets. Indeed, Mr Carney went on to warn traders that they could face up to 10 years in prison for abusing market regulations. Even City of London Lord Mayor, Alan Yarrow, who spoke first, said “upholding professional standards should be a guide for financial workers.
And continuing on with the theme of banks, and bankers, HSBC have announced that within their restructuring plans they would shed thousands of jobs in the UK, and up to 25,000 worldwide by the end of 2017. Also in an update to the markets, and investors, the bank has also announced prospects for significant branch closures throughout Britain with the possibility of it relocating its headquarters in the UK to an alternative location, with Hong Kong being the likeliest destination.
Similarly the bank confirmed that they were looking to sell their businesses in Turkey and Brazil with Spanish banks BBVA and Santander being possible candidates to acquire the businesses. Arguably, this might have further ramifications for the likes of Standard & Chartered, or indeed, other British banks, which might then consider their status and business models.
Equally looking out towards Asia, the Chinese stock market continues to power ahead with the Shanghai Composite Index now up by over 60 per cent for the year. Certainly, monetary stimulus that is currently being set by The Peoples Republic of China has buoyed up investor sentiment with many investors now looking for further rate cuts over the coming months. Certainly, last week’s economic data seemed to indicate that parts of the Chinese economy was indeed stabilizing with factory output, and credit growth, accelerating in May, whilst exports and producer prices fell.
Elsewhere, the Japanese equity market has shown some signs of resilience, against the backdrop of events across the eurozone, and the non-participation of further quantitative easing from the BOJ. Clearly, the Governor of the Bank of Japan, Haruhiko Kuroda, seems happy with the current level of the yen, and the benefits that the weaker currency is having on Japanese corporate profits and the economy. Admittedly, if the yen was to continually weaken then this could have ramifications and spark off a “currency war” within the region, therefore; many of the central banks within Asia are now prepared to let their currencies fall to counteract the yen affect.
Now turning to the markets, obviously, European equities remain the most vulnerable to a shake out if Greece were to default, with the likelihood that the rest of the world would then react accordingly, in terms of bonds; we have already seen yields across the mainstream of western government bond markets back up over the past couple of weeks with 10-year German bund yields moving from 0.05% to 0.83% which is a huge change in direction, never-the-less we will continue to see the ECB buying bonds over the coming months giving some support to this asset class.
Subsequently, the markets are likely to remain quite volatile with the two most pivotal events to drive the markets being any decisions made by the Federal Reserve Bank in respect to interest rates and obviously the fear of Grexit. Therefore, with this in mind some tactical positioning might be the most prudent course of action until things become a little clearer.
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.