World Markets at a Glance
In this week’s issue
- The US non-farm payroll numbers surprise the markets beating consensus by a large margin.
- On the back of better US job numbers short-term Treasuries and the dollar hit new highs.
- Investors reduce their exposure to Government Bonds, Emerging Markets and Gold Bullion.
- European and Japanese equities remain the global investors risk asset class of choice.
- The decoupling of central bank monetary policy will have ramifications for stock markets.
- It just remains for the Fed to decide whether to raise interest rates this year or early 2016.
What does this mean for the markets and asset classes?
“Global stock markets continue to gyrate to central bank uncertainty”
The divergence of central bank monetary policy ebbs ever nearer as last week’s better than expected US non-farm payroll numbers puts the possibility of a US interest rate hike in December firmly back on the agenda. The consensus increase forecast for US jobs was 182,000 but the number came in at 271,000 whilst the jobless rate number eased from 5.1 per cent to 5.0 per cent. Also what the FOMC members will find encouraging is that the average earnings rate grew by 0.4 per cent on the month, more than was expected. This means that it stands 2.5 per cent higher than a year ago and the biggest annual increase since mid-2009.
Understandably, this better-than-expected news had an immediate effect on most asset classes with shorter term Treasury yields hitting a five year high whilst the US dollar hit a seven month peak. Also global investors have taken a view that it is time to make some additional asset allocation changes by taking funds out of longer-dated government bonds, emerging markets and gold, given that these asset classes are likely to be hurt by any future interest rate hikes. In the meantime, regions such as Europe have seen inflows as investors anticipate that monetary policy in the eurozone will remain accommodative for the foreseeable future.
Indeed, despite external pressures the eurozone still appears to be on track for recovery and the recent comments made by European Central Bank president, Mario Draghi, that he may consider expanding the size of its current €60 billion-a-month asset buying programme, or extend it beyond September 2016, means that favourable investment conditions will in all likelihood remain in place for some time to come.
In addition to this the recent ECB quarterly bank lending survey has revealed that the banks have continued to ease credit conditions in the third quarter; it also reported a strong demand from companies and households. This was taken as good news by investors, and of course, with the euro beginning to show signs of further weakness against the dollar, positive corporate earnings surprises from European exporters over the coming months would seem a likely outcome.
Likewise, Japanese stocks are on the cheapest valuations amongst the developed markets, with earnings growth in corporate Japan being attractive and resilient. Admittedly, there are now some concerns that the “third arrow” of the “Abenomics” programme is faltering with weak trade figures and stubbornly low inflation adding to overall concerns. Equally, pressure is mounting on the Bank of Japan to exercise further monetary policy to kick start the Japanese economy and most professional investors believe that further QE will be announced in due course.
We are also likely to see further longer-term Japanese government plans to shift more public pension funds away from fixed interest securities into equities which will act as a further stimulus for the Japanese stock market. Similarly, in Europe any further weakness in the yen will create a helpful environment for Japanese exporters and an optimistic corporate earnings outlook.
Noticeably, US equities now appear the most expensive, given that the US earnings cycle is more advanced than that of Europe or Japan, with profit growth having already peaked. This in turn, is likely to lead to a much more modest increase in profits in the US versus other parts of the world, never-the-less, if the US dollar does strengthen further, as the Fed increase interest rates, then we could see global investors add to their US dollar positions, and over time, re-cycle those dollars into Treasuries and US equities, especially, if we were to experience a worthy correction.
Tentatively, this leads us nicely onto the emerging markets, and commodities, where we have seen some recent interest from investors who appear to be rebuilding their positions albeit carefully. However, at the same time whilst conditions have improved since the Chinese authorities took fiscal measures to stabilise their weakening economy, macro sentiment still remains against these asset classes over the short-term. Conversely, the discount between the emerging and developed markets does seem rather excessive therefore it is understandable that interest is being shown. Likewise, with so much restructuring, and cost cutting, evident in the oil and mining sectors there would seem to be some attractive opportunities appearing.
Unquestionably, any worthy rebound in oil or mining stocks would help the FTSE 100 Index given its high exposure to these two sectors. Furthermore, on monetary policy the Bank of England governor, Mark Carney continues to display his rather dovish intent suggesting that the UK would lag behind the Federal Reserve Bank in raising borrowing costs, and that external worries prey on the minds of its policymakers, which in turn, saw the pound nosedive against other leading currencies around the world.
It appears therefore that we are drawing ever nearer to a time when the major five central banks of the world, the Fed, BoE, ECB, BoJ and PROC are going to decouple, with the first two tightening their policies, whilst the other three remain in the camp of loosening. This will plainly have ramifications for asset classes, geographic’s and global sectors, which in turn, will need to be addressed by global asset allocators. However, it is unlikely that we will see a great deal of change for the remainder of this year, but with the first rise in interest rates for nearly a decade not too far away, we are likely to experience a pickup in volatility, as markets begin to acclimatise to higher borrowing costs.
We should expect the markets to ebb and flow over the remaining few weeks of 2015, but perhaps with a more positive slant as we move towards the year end. Without doubt, concerns will continue to linger about the slowdown of the Chinese economy, or whether the Greeks will exit the euro, or indeed, Brexit, but it will be the Fed chair, Janet Yellen, that will be the biggest influence on markets over the coming weeks as the US central bank decides whether to begin tightening in 2015 or wait until 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 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.