The Lowdown on Markets to 4th December

December 7, 2015 admin

The Lowdown on Markets to 4th December

World Markets at a Glance








In this week’s issue

  • Another month of positive US non-farm payroll numbers clears the way for a December hike.
  • The European Central Bank disappoints as their latest measures fall short of expectations.
  • The Federal Reserve Bank hints that the US economy is strong enough to endure rate hikes.
  • Both US and European markets diverge on central bank decoupling expectations.
  • Whilst US interest rates are likely to rise will their economy face a mild recession in 2016?
  • Central bank intervention is likely to remain a real influence on markets throughout 2016.

What does this mean for the private clients, markets and asset classes?


“A robust US jobs report and ECB’s latest actions makes for a volatile week”


The month of December began in a rather uncertain and volatile mood as speculation mounted around what the European Central Bank might reveal about any future changes to the quantitative easing programme, and of course, that very important US jobs report prior to the Fed’s decision as to whether they will raise US interest rates for the first time in a decade.


Certainty, the actions taken by central banks, in respect to interest rates, and quantitative easing, has been the dominant theme that has run through the markets post the financial crisis, which in turn, has seen bond yields fall to historical lows, whilst interest rates have fallen to such levels that in certain countries, and regions, they are at present in negative territory.

“The US Federal Reserve Bank prepares to raise interest rates for the first time in many years”


Clearly, the implementation of these fiscal tools over the past decade has now left us with differing challenges as we go forward into 2016. Already, some analysts are calling the next period of fiscal policy “the Great Divergence”, as the US Federal Reserve Bank prepares to raise interest rates for the first time in many years, whilst the European, Japanese, and Chinese central banks continue to be accommodative lowering interest rates and increasing their quantitative easing programmes.


The upshot of this means that there will be some very important ramifications for the direction of bond, equity and currency markets, particularly the latter, indeed, we have already seen the effects of loose monetary policy, generating periods of uncertainty, “currency wars”, and a “race to the bottom” as central bankers applied interest rate cuts, and devaluation strategies, to weaken off their domestic currencies.


Indeed, by creating this environment, whereby you substantially weaken off your currency, means that it makes it easier for your exporting companies to compete internationally, similarly, it does mean that your imports become more expensive, making the consumer feel  worse off, unless of course, they buy domestic goods that are not reliant on imported parts. Understandably, this subject  of whether a strong, or weak currency, benefits an economy is clearly a very complex topic at the best of times, and of course, we are not living through normal times, to the contrary, we have seen the history books re-written many times over in recent years, as financial shocks have taken their toll.

“The ECB president, Mario Draghi’s latest proposal to revive the Eurozone’s weakening economy seems to have come up short of the mark”


Looking over last week’s events we can see that the ECB president, Mario Draghi’s latest proposal to revive the Eurozone’s weakening economy seems to have come up short of the mark, which in turn, failed to impress the market. Indeed, the European Central Bank’s pledge to continue with its €60 billion-a-month bond buying programme, beyond September 2017, extending the period until March 2017, cutting the key interest rate to a historical low of minus 0.3 per cent, and widening the buying programme to include municipal bonds, in addition to government paper.


Clearly, this news was greeted by a wave of despondency by the markets, which in turn, lead to the Europe’s index of 300 largest companies falling by over 3 per cent, whilst government bond prices sank, and the euro leaping up against the US dollar. Never-the-less, dissatisfaction or not, the big game changer will be determined by the Federal Reserve Bank, given that if they do announce an interest rate hike in mid-December, then we are likely to see the single currency retreat once again against the greenback and a plausible asset allocation call that European equities could out-perform US equities in 2016.

“Mario Draghi is “the master of surprises”


Obviously, markets were disappointed with this outcome, but, was it just that the ECB wanted to be practical ahead of the US jobs report, and the Fed’s decision on whether to raise rates, or was it just that Germany’s Bundesbank had discouraged the European Central Bank in doing anything too aggressive, given their known dislike to QE?, or perhaps it’s just simply that the ECB wants to show global investors that it cannot be the markets best friend forever?. Mind you “Mario Draghi is “the master of surprises”, so maybe, he just wants to keep some of the banks powder dry before firing off the big bazooka in 2016.


And so the focus will now turn totally towards the United States and the challenges that face the Fed chair, Janet Yellen. Will she and the members of the FOMC finally pull the trigger and raise interest rates. Clearly, last month’s robust US employment data, and the October revised job numbers, does seem to have put the Fed back on the launch pad to raise rates this month.


Admittedly, there are still some signs of fragmentation around the edges within the US economy, such as the corporate sector, which tends to lead the economic cycle, but currently is looking, rather stretched, therefore vulnerable to any monetary tightening, or macro shocks whether it be internally or externally. Equally, whilst the job numbers may have been fairly robust it has not translated into a comparable gain in GDP, or indeed, any wage inflation, which is rather concerning.

“The Federal Reserve Bank have revealed some real concerns over recent months in respect to the economic slowdown”


Understandably, the Federal Reserve Bank have revealed some real concerns over recent months in respect to the economic slowdown in the emerging markets and China, and of course the outflows out of the aforementioned. Unquestionably, the prospect of rising interest rates and higher lending costs has seriously harmed investor sentiment for the developing markets prompting higher levels of volatility.


Obviously, Ms Yellen has appeared to be “a lady of calm” over recent months, however, I do think that the Fed have missed their opportunity to raise interest rates earlier in the year, and of course, with a weakening global economy there is now a distinct possibility that the US economy will face a mild recession sometime in 2016. Sadly if this happens then any rate hike in December, or early in the New Year, could be perceived by the markets as real policy error.


And so from an asset allocation perspective where does that leave investors? I would suggest being very selective in what they own, active management is likely to do better than passive strategies in many parts of the world, but the stock picking skills of individual managers will clearly be tested with the likelihood of another year of central bank intervention remaining a key driver for global equity, bond and currency markets.







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 a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.

This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed.

Investment Quorum is authorised and regulated by the Financial Conduct Authority .


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