Global equity markets were in the red last week, with the sharp slide in commodity markets providing a worrying signal on the outlook for global growth. In Europe, the FTSE Eurofirst 300 closed down 2.77% for the week, similar to the declines experienced across the major US equity indices. China’s Shanghai Composite Index of mainland shares bucked the trend, rising 2.87%, with the market closed on Friday when weaker than expected PMI data was announced.
It was another tough week for commodity investors. The price of a barrel of Brent Crude oil and WTI Crude Oil fell 4.26% and 5.14%, respectively. After staging a comeback in March, the rally in oil prices proved to be short lived with the price of Brent Crude now down 18% since May 1st. Oil attracts most of the attention given its central role in the world economy and high weighting in the commodity indices, but we are seeing a decline across the board in commodities, a cause for concern on the deflation front.
Amidst the sell-off government bonds were in demand with the German 10-year bond yield declining 11bps to 0.69%. On the currency front the Euro moved higher as risk aversion set in, a by-product of its funding currency status, rising 1.11% against the US dollar to $1.097. Commodity related currencies such as the Aussie dollar and the Canadian dollar continued to suffer, mauled by the commodity bears.
The US Federal Reserve, seen by many as a bastion of secrecy and the source of much fodder for conspiracy theorists everywhere, had another mea culpa moment last week. In a statement Friday, we were informed that staff projections for interest rates and the economy, prepared for the June 16-17, 2015, meeting of the Federal Open Market Committee (FOMC), “were inadvertently included in a computer file posted to the Board’s public website on June 29”. Although the Fed have repeatedly failed to implement basic internal controls, I am sure we can rest easy that they are more than capable of ending a 10 year easing party without market dislocation!
European equity markets opened sharply lower this morning following a sell-off in China overnight. Last month I likened investing in Chinese equities to riding a moped in China, crowded and dangerous. Since then it has become even more hazardous, despite the best efforts of the People’s Bank of China and the government to prop up the market. Last night, investors hit the equivalent of black ice, as the Shanghai Composite Index of mainland Chinese equities, fell a stunning 8.5%, the worst daily decline since 2007, with concern over the wider outlook for the economy growing.
There is data from Europe on unemployment, inflation and retail sales, while in the US the advance estimate of second quarter GDP will be keenly watched along with durable goods orders. There is a raft of data from Japan, providing the latest update on the success of “Abenomics”’ in Japan, at a time when Prime Minister Shinzo Abe’s approval ratings are falling.
The monetary policy meeting at the US Federal Reserve will be centre stage as investors eye the first interest rate increase since 2006. The Fed will likely test the waters on a rate hike before the end of the year, unless we deviate from the current path in terms of the economic data. Further strength in the US dollar could be an inhibiting factor domestically while abroad they will be particularly focused on events in China. If the slide in commodity markets continues then it would prove difficult for the Fed to begin raising rates. Either way, Yellen will continue to reiterate that the Fed funds rate will remain below normal levels for a considerable time after the first rate hike.