The majority of the major equity indices closed in positive territory last week, government bond yields moved marginally lower, and volatility picked up in the currency markets, as central banks remained front and centre. The minutes from the US Federal Reserve’s most recent monetary policy committee meeting confirmed that a June rate hike is off the table but that it could happen later in the year if economic data picks up. Nothing new here really. For me, the biggest risk to financial markets over the remainder of the year is if the US economy fails to regain momentum, a scenario that is yet to be priced into markets, as the consensus expects the inevitable pick-up.
The major European equity indices were among the best performers last week, as the Euro moved sharply lower against the US dollar, a relationship that has been strong since the ECB stepped up their monetary policy efforts. The Euro fell almost 4% against the US dollar and the FTSE Eurofirst 300 rose 2.85%. The German 10-Year government bond yield closed 2bps lower on the week at 0.61%. US equity markets closed near record highs, while in Asia, Japan’s Nikkei 225 rose 2.69%. In China, the latest warning sign on bubble activity was the one day decline of over 40% in three separate stocks!
Markets in the US and the UK are closed for public holidays. European equity markets have opened lower following a strong showing for the anti-austerity party Podemos, in yesterday’s Spanish municipal elections.
On the macro front this week we will get the second estimate of first quarter GDP growth for the US economy. The initial estimate showed a sharp drop in growth in the world’s largest economy, but this has been attributed to the inclement weather and the decline in capital expenditures related to the oil price collapse. The outlook is uncertain so reports from the US on durable goods, employment, housing, spending and consumer confidence should also help gauge whether the recent weakness is transitory or more serious.
There is a raft of economic data from Japan on Thursday and Friday which should provide an update on the progress of Shinzo Abe’s reflation strategy, including reports on retail sales, unemployment, consumer price inflation, housing and industrial production. The IMF last week encouraged the Bank of Japan to pursue more aggressive monetary policy, as risks to Japan’s economy are “tilted to the downside”.
In Europe, the Greek drama continues to cast a shadow and reports suggest it still remains in the balance whether a solution will be agreed that will keep Greece in the Euro. The Greek finance minister, Yanis Varoufakis, announced yesterday that Greece will not have the money to make the next IMF payment on June 5th, so time is clearly running out. A Greek departure would spell the end of the single currency project, according to Varoufakis, “Once you infuse into people’s minds, into investors’ minds, the idea that the euro is not indivisible, it will be only a matter of time before the whole thing begins to unravel.”