A Different Perspective
Asking the Right Questions
Weekly Market Recap: Week of December 8th 2014
Market Recap
Global equity markets continued to move higher last week, with many of the major equity indices closing at new record highs. The FTSE Eurofirst 300 was up 1.8% on Friday after better than expected US employment data while the German DAX index jumped 2.4% to close at a new record high. Japan’s Nikkei 225 Index rose 2.64%, buoyed by the weaker Yen. Meanwhile, government bond yields moved higher as bonds sold off with the German 10-Year government bond yield closing up 7bps at 0.78%. In the commodity markets, oil remains under pressure while the monetary policy divergence theme continues to play out in the currency markets with a strong US dollar gaining further ground against the Euro and the Yen.
Week Ahead
Key macro data for the week ahead includes updates on inflation, industrial production, trade and unemployment from most of the major economies as well as a number of important surveys measuring the current sentiment of consumers and businesses. The take up from banks on the second tranche of the ECB’s cheap TLTRO funding will be closely watched, after the poor take up on the first tranche provided a catalyst for the recent market correction.
Retail sales and initial jobless claims from the US this week will also focus investors’ minds in advance of the final Federal Open Market Committee meeting of the year on December 16th/17th. With recent US data picking up, investors will begin to once again focus more on the timing of interest rate hikes and the implications for financial markets. After disappointing third quarter GDP data, the Bank of Japan’s quarterly Tankan survey, an important indicator of business sentiment used in formulating monetary policy, will provide more of an update on the trajectory of the economy.
Better US Jobs data is now good news…..
In truth, the ECB press conference was anti-climactic and the real impetus for equities to move higher last week was the better than expected US employment situation report on Friday. Total nonfarm payroll employment increased by 321,000 in November, well above the consensus estimate for 230,000, and there was also upward revisions to previous months. Coupled with the pick-up in wage growth the narrative seems to be changing on the prospect of rate hikes, whereby more market participants believe that the economic recovery can sustain itself through a rising interest rate environment. This seems like a big leap of faith!
Oil prices at a five year low, Russia in focus…..
In the commodity markets, the price of oil continues to move lower putting further pressure on the energy reliant economies hurt by a vicious cycle of declining oil revenues, currency devaluation and higher interest rates. Some form of government debt default by Venezuela is seen as increasingly likely but it is the energy reliant Russian economy that remains a focal point, given its economic size and fractious relationship with the West. Russian government bond yields are at the highest levels in five years with the 10-year government bond yield trading at 12.55%. Their central bank is now in firefighting mode to prevent an all-out rout in the Ruble, which has lost 37% against the US dollar since the end of June
Draghi keeps the dream alive, “expected” is now “intended” but “not yet a target”
ECB President Mario Draghi kept the dream alive for the quantitative easing enthusiasts who believe that when all else fails, buy government bonds! The only real change in the ECB’s statement was the use of the word “intended” rather than “expected” in relation to returning the balance sheet to the level at the beginning of 2012, meaning an increase of c. €1 trillion. Questioned on the “stronger language”, Draghi confirmed: “yes indeed, intended is different from expected. It’s not simply an expectation; it’s an intention, but it’s not yet a target. So it’s something in between. It’s something in between”.
UK Office for Budget Responsibility, “we’ve made a huge mistake”…
The latest economic and fiscal outlook from the UK’s Office for Budget Responsibility (OBR) showed that despite an expected loss of momentum in the recovery in 2015, the government is on track to meet their fiscal mandate. Most notable from the report is the lower debt servicing costs assumed, with the OBR reducing the cost of servicing the nation’s debt by £18 billion per year to 2018-19. Cheers to the Bank of England!
£4 billion of this cut in their forecast was down to an “error in our forecast model” which led to their model “over-predicting the stock of debt over time”. The initial reaction on spotting a £4 billion error must have been something like this: I’ve made a huge mistake, but thankfully it will help the government put the budget back in balance by 2018-19. Models are great!
Time in the market versus timing the market
There is an old investment adage that says “It’s About Time in the Market, Not Timing the Market” and certainly the action in financial markets over the last three months does add some credence to this. A distant memory now, the sell-off that began in September and intensified in mid-October saw the major equity market indices fall sharply. There was also a flash crash in the US Treasury bond market whereby we witnessed a jaw dropping 35bps drop in the 10-year US treasury yield in minutes. The CBOE Volatility Index (VIX), a key measure of market expectations of near-term volatility and termed the ‘fear index’, spiked to 30.88, up from 12.03 on September 18th.
Still, that was then, and this short term blip has been erased after the world’s major central banks helped reverse the panic sell-off with some words of reassurance followed by an extra dose of monetary policy stimulus. Equity markets have bounced back spectacularly from the lows of mid-October, while volatility has fallen back near the record low. In Europe, the German DAX equity index has jumped over 19% to recoup all of the losses incurred while in the US, the S&P 500 is up over 11% and back at a new record high. Japan’s Nikkei 225 index is up 20% over the same period, to a 7-year high.
As I wrote in my October 20th commentary, “The reality is that over the long term (greater than 25 years) these market moves look much less frightening…Equities over the long term have been the best performing asset class, but that comes with the type of volatility we have seen in recent weeks.” In other words, long term investors wanting to participate in this return potential have to be willing to accept the volatility and uncertainty that comes with their ‘time in the market’.
Bonds & Equities higher, but Oil is the real story as OPEC leave it to the free hand of the market to dictate prices
Global equity markets edged higher again last week while government bond yields moved lower. Of the major indices, China’s Shanghai Composite was the standout performer, jumping 8%, buoyed by the recent interest rate cut and the prospect of a further loosening of monetary policy. It was a shortened trading week in US markets, with Americans ‘giving thanks’ on Thursday before splurging in the madness that is the Black Friday frenzy.
European government bonds were in demand as speculation mounts that ECB President Mario Draghi will eventually get past German opposition to purchasing the sovereign bonds of member states. The German 10-Year bond yield dropped to 0.71% while the equivalent yields in France, Ireland and Spain closed the week at 0.97%, 1.38% and 1.90%.
The real story last week was in the oil markets as OPEC, the oil cartel, announced Thursday their decision to maintain the current production level target of 30 million barrels a day. Rather than cut production to stabilise prices (as they would typically do), against a backdrop of lower demand and increased supply from US shale production, they elected to leave it to the free hand of the market to dictate prices.
On the news, the price of a barrel of Brent crude oil fell 6.6% and closed the week down $10.21 at $70.15, the lowest level since 2010 and down almost 40% since mid-June. As mentioned previously, there are winners and losers at a corporate and country level but it will also be a concern for central banks fighting deflation risk.
Weekly Market Recap: December 1st 2014
Market Recap
Global equity markets edged higher again last week while government bond yields moved lower. Of the major indices, China’s Shanghai Composite was the standout performer, jumping 8%, buoyed by the recent interest rate cut and the prospect of a further loosening of monetary policy. It was a shortened trading week in US markets, with Americans ‘giving thanks’ on Thursday before splurging in the madness that is the Black Friday frenzy.
European government bonds were in demand as speculation mounts that ECB President Mario Draghi will eventually get past German opposition to purchasing the sovereign bonds of member states. The German 10-Year bond yield dropped to 0.71% while the equivalent yields in France, Ireland and Spain closed the week at 0.97%, 1.38% and 1.90%.
The real story last week was in the oil markets as OPEC, the oil cartel, announced Thursday their decision to maintain the current production level target of 30 million barrels a day. Rather than cut production to stabilise prices (as they would typically do), against a backdrop of lower demand and increased supply from US shale production, they elected to leave it to the free hand of the market to dictate prices.
On the news, the price of a barrel of Brent crude oil fell 6.6% and closed the week down $10.21 at $70.15, the lowest level since 2010 and down almost 40% since mid-June. As mentioned previously, there are winners and losers at a corporate and country level but it will also be a concern for central banks fighting deflation risk.
Outlook
Key macro data for the week ahead includes reports on GDP, industrial production, employment and trade as well as a host of PMI surveys from around the globe. On Wednesday, Eurostat will publish the latest retail sales data for the Euro area while on Friday there is the release of the second estimate of third quarter GDP growth, after the first estimate showed the economy expanded by 0.2%.
There are a raft of reports from the US, including US factory orders, trade data and the employment situation report. After last week’s GDP report showed that the US economy grew faster than expected in the third quarter, further improvement in the main employment indicators would give the US Federal Reserve more to ponder on the timing of rate hikes.
Monetary policy meetings will take place this week at the Reserve Bank of Australia, the Bank of Canada and the Bank of England while the European Central Bank (ECB) will take centre stage. Over the last few weeks Mario Draghi has talked up his commitment to do more if needed, raising investor expectations for the ECB to follow other major central banks and begin purchasing government bonds. This has boosted European equity and bond markets but investors may be underestimating how high the “hurdles” are for the governing council to agree to more expansive measures.
Steven Gerrard: 16 years an LFC player, forever a Legend!
Consistency of performance is the holy grail of active management, but it is really what everyone at the highest level of their profession strives for. One man that has been doing it consistently for 16 years is the legendary Steven Gerrard. Saturday marked the 16th anniversary of his first game for Liverpool FC, a career that has seen him carry his beloved club, which at times has failed to match his ambitions. While his powers have waned, as the ‘slow creep of age’ that catches us all has taken its toll, the anniversary is more about recognising his contribution as one of Liverpool’s all-time greats. The epitome of a leader, “there is a player who kisses the badge and means it…”
Mario Draghi: “Following through with the consequences”
ECB President Mario Draghi gave a speech last week at the University of Helsinki entitled “Stability and Prosperity in Monetary Union”, that to me almost had a Mafioso tone to it. Draghi is steadfast in his belief that the Euro is here to stay but almost to the point that implies member states are now trapped in this “political construct”, repeatedly using words like irrevocable, binding and permanently. “Members have to be better off inside than they would be outside….if one country can potentially leave the monetary union, then this creates a replicable precedent for all countries. The euro is – and has to be – irrevocable in all its member states, not just because the Treaties say so, but because without this there cannot be a truly single money.” That iconic scene from Godfather III comes to mind when Michael Corleone laments the fact that he can never escape the Mafia life; “Just when I thought I was out….they pull me back in”. It looks like our future is in a more centrally planned Europe, for good or for bad.
