Market Recap: Week of April 27th 2015

Market Recap

Global equity markets moved higher last week as earnings announcements in the technology sector were received well, with investors in Amazon and Microsoft seeing big gains. The movement on some of the technology shares over the past few weeks on the release of one quarter of earnings once again highlights the short term focus of many market participants. Last week, shares of Amazon rose 15% in one day following their latest quarterly release, while the previous week shares of Netflix rose 18% the day after their quarterly announcement.

New record highs for the major US equity indices….

The major US equity indices closed at new record highs on Friday, with the S&P 500 rising 1.75% over the week. The tech-heavy NASDAQ Composite breached the dotcom bubble peak reached in 2000. In Europe, the FTSE Eurofirst 300 closed up 1.2% for the week, despite a stronger Euro. Japan’s Nikkei 225 index closed at a 15-year high, up 1.9%, while Chinese equities continue their rapid ascent. The mainland Shanghai Composite equity index was up 4.16% last week, as speculation mounts that looser monetary policy lies ahead in China.

The everlasting gobstopper and rising equity markets….

In Roald Dahl’s Charlie and the Chocolate Factory, Willy Wonka claimed he had a secret machine to create an everlasting gobstopper, ‘you could suck on them forever and they would never get any smaller’. Looking at equity markets and their pavlovian response to monetary policy, it would seem that central banks have created a machine whereby the marginal effect of monetary policy never wanes and equity markets continue to move higher. However, unlike Wonka’s gobstopper, it seems implausible to believe that the fine taste of rising equity markets can last forever for investors. Equity markets are long overdue a healthy correction; it would not be such a bad thing for long term investors.

Core government bonds…..

Core government bond yields moved higher last week as risk appetite increased. After hitting a record low of 0.05%, the German 10-Year government bond yield doubled over the week to a yield of 0.16%. The tone of the Bank of England’s most recent monetary policy weighed on UK bonds, with the UK 10-year government bond yield up 6bps to 1.77%.

A year is a long time in Greece….

It was just over a year ago, April 10^th 2014, when the Greeks returned to the bond markets, with much fanfare after four years of exile. The country issued €3 billion of government bonds with a maturity of five years and a yield of 4.95%.  Most stark was the fact that the bond issue attracted over €20 billion of interest from over 550 investors. The then Prime Minister Antonis Samaras revelled in the moment, noting in his televised address at the time: “Confidence in our country was confirmed by the most objective judge – the markets”. Things have changed dramatically over the year with short term yields at eye popping levels, not just a sign of how quickly sentiment can change, but more importantly an example of how market ebullience can undermine true objectivity.

Week Ahead

European equities have opened lower this morning after a mixed session in Asia overnight. Japan’s Nikkei 225 equity index closed marginally lower, while Chinese equities continued their rapid ascent, with the Shanghai Composite equity index rising 3.06%.

Key macro data this week includes purchasing manager index (PMI) reports from around the globe, first quarter GDP data from the US and the UK, as well as the key U.S. non-farm payrolls employment report on Friday. There are also a host of consumer and business confidence surveys from Europe and the UK, useful leading indicators on the economy. The preliminary April reading for inflation in Europe will be in focus as investors look for signs that the risk of deflation is subsiding. The monetary policy meetings at the Bank of Japan and the US Federal Reserve will be keenly watched. Investors will be focused on Janet Yellen’s press conference for any clues on the timing of rate hikes. The minutes from the Fed’s most recent monetary meeting showed that committee members are still torn on when rates should rise. US earning seasons continues with Apple, the world’s largest company by market capitalisation, reporting on Monday.