The Lowdown on Markets to 6th May 2016
World Markets at a Glance
In this week’s issue
- Global equity markets retreat to their lowest levels in the past three weeks.
- The latest US non-farm payroll numbers fall short and disappoint the markets.
- Any future US interest rate hikes are likely to be delayed until later on this year.
- The US dollar hits an 18-month low against the yen as doubts rise over the US economy.
- The crude oil price rallies but is this down to short coverings by hedge funds.
- The good news is that the global economy is still recovering, be it at a moderate pace.
“Global equity markets are disappointed by the latest economic data”
Last week we saw the global equity markets retreat to their lowest levels in the past three weeks, with Europe, China and Japan now sharply down for the year, the FTSE All-World Index has fallen by more than 3.0 per cent since mid-April and the S&P 500 Index is up by a paltry 0.5 per cent. Equally, the US dollar retreated to an 18-month low against the yen whilst yields on many government bonds have dropped again to levels last seen in early January.
The retreat in the equity markets was initiated by the latest report on the US labour market with the figures coming in much lower than the consensus forecast, whilst the previous two months numbers were revised down. This in turn, saw a number of the leading investment houses and analysts push out their forecasts for the next interest rate hike until September, or even much later, March 2017.
Certainly, we have seen copious periods of rotation in the financial markets this year, against an ever changing backdrop of recovery to recession theories. This in turn, has seen some abrupt periods where asset classes have moved aggressively, in both directions, in response to commentaries from the central banks, and of course, a constant stream of confusing economic data, which has then led to international organizations such as the International Monetary Fund downgrading their forecasts for global growth.
“We have seen a strong recovery in the emerging markets, crude oil, and commodities”
As a result of this, and what is being perceived by many as a mixed economic outlook, the different asset classes have clearly responded accordingly. Certainly, we have seen a strong recovery in the emerging markets, crude oil, and commodities, on the belief that the Chinese economy will have a soft landing; that the Fed will remain dovish on interest rates throughout the rest of the year, given their worries over the US economy, and that the US dollar will remain fairly subdued against other leading global currencies.
And as for the bond markets, they also appear to be predicting that the Federal Reserve Bank will not raise interest rates for the foreseeable future, this is despite the Fed governors guidance that they will. Indeed, bond yields continue to fall with the UK government bond market outpacing those of the US and Germany on a combination of disappointing data from the British and US economies.
“In the US the result of the presidential election in November could be a huge “game changer” if Donald Trump were to be victorious”
But of course, it’s not just about the Fed, or indeed China, that repeatedly concerns the markets, certainly, in the UK we are moving ever nearer to the “BREXIT” vote in June, with the outcome still in the balance, and in the US the result of the presidential election in November could be a huge “game changer” if Donald Trump were to be victorious, given that he has already said that he would replace Janet Yellen as Chair of the Fed.
Similarly, in Europe and Japan concerns have mounted over the deployment of negative interest rate policies by the European Central Bank and the Bank of Japan, which in turn, appears to have had the opposite effect to what the authorities were expecting, which was for the euro and yen to weaken rather than strengthen as seen over recent weeks. Maybe the recent withdrawal of assets from US, European and Japanese equity funds in favour of money markets, Government bonds and gold funds has skewed sentiment and currency exposure.
“We have seen the energy market spike up, with the price of crude oil rallying aggressively in recent weeks”
Clearly, over recent weeks the hawkish signals that have come out of the Fed, the mixed corporate US earnings results, and some varied economic growth data around the world has become confusing for the stock markets, which in turn, has wrong footed some global investors, creating a short-term sell off in riskier asset classes. In reverse, we have seen the energy market spike up, with the price of crude oil rallying aggressively in recent weeks, despite the fact that it would appear that we still have a glut of oil in the world. None-the-less, it is thought that some of the hedge funds, who have had a torrid first quarter, might have been squeezed ,and therefore, been covering short positions, hence the unexpected instability in the oil price.
However, with the current oil price at US$45.0 a barrel, no freezing of supply from OPEC, and the remaining US oil shale producers threatening to turn the taps back on there is a distinct possibility that the price will fall back down over the coming months. Therefore, will this be an issue? Well it might be given that the S&P 500 Index and the price of oil has been fairly well correlated over recent times, meaning that when the oil price has fallen so has equity markets. Equally, if the oil price were to retreat it would once again benefit the consumer, and the oil importers.
And so there still seems to be many important issues that need to be addressed, which are likely to create further unpredictability in the markets over the coming weeks and months, whether it be the Feds next monetary policy move, the direction of the Chinese economy, currency wars, the outcome of “BREXIT”, the Eurozone and Japans NIRP positioning, OPEC’s stance on freezing oil supply, or the critical outcome of the US presidential election.
“The good news is that the global economy is still recovering, be it at a moderate pace”
However, the good news is that the global economy is still recovering, be it at a moderate pace, and therefore global investors need to be patient as investment returns are likely to remain muted over the short-term. Plainly, the risks are still slanted towards deflation as doubts still prevail over many of the issues mentioned above. Never-the-less, selective global equity markets still represent better value than global government bond markets, on a risk adjusted basis, consequently, any meaningful correction in the equity markets should be considered as a potential buying opportunity for any long-term investor.
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 .