Weekly Market Recap: February 2nd 2015

Global equity markets closed in the red last week and bond yields continued to move lower as US economic data disappointed, Eurozone inflation fell further and the Greeks added to a general feeling of uncertainty on the outlook for the Eurozone. The much quoted CBOE Volatility Index (VIX), a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, jumped nearly 26% last week, another sign that investors are finding it more difficult to appraise the current environment.

The advance estimate for fourth quarter US GDP growth showed the US economy grew by an annualised 2.6%, below the consensus estimate of 3.2%, and down from 5% in the previous quarter. The US Fed reminded markets that they will remain “patient” when it comes to raising interest rates. An apt quote from Ambrose Bierce, an American satirist, comes to mind: “Patience – A minor form of despair, disguised as a virtue”.  The truth is that the Fed would like to normalise monetary policy. Yet the reality is that after six years of record low interest rates and massive bond buying they are still afraid that the US economy cannot withstand interest rate hikes.

Eurozone annual inflation is expected to be -0.6% in January 2015, down from -0.2% in December, according to the flash estimate from Eurostat, raising more concern that Europe has already turned Japanese. As for the Greek situation, there is posturing on both sides. Angela Merkel, has said that she ‘does not envisage fresh debt cancellation’, which would make it impossible for the newly elected Greek government to bring an end to austerity, the mandate which got them elected. More drama to unfold!

Equity markets move lower…..

Most of the major equity indices closed lower last week. In the US, the S&P 500 fell 2.77% for the week while the UK’s FTSE 100 Index was down 1.22%. In Asia, China’s Shanghai Composite was the worst performer, falling 4.22%. Declines in Europe were more muted, except for Greece, and the German DAX Index bucked the trend with a small gain of 0.42%. The Athens General Index fell 14%, as bank shares were hardest hit.

Core government bond yields move lower…..

Meanwhile, core government bond yields moved lower last week with yields in Germany hitting new record lows. The German 10-Year government bond yield closed the week at 0.31%, while the yield on the German government bond maturing in 2046 now has a yield of 0.95%! Looking for some extra yield? Well the yield on the Greek government bond maturing in 2017 almost doubled last week, to 18.43%!!! Haircut time???

Week Ahead 

European markets have opened mixed this morning. Key macro data this week includes Purchasing Manager Index (PMI) reports from around the globe, retail sales data from Europe and industrial production data from Germany. The key non-farm payrolls employment report released on Friday will provide an update on the U.S. labour market, an influential report for Fed policy. On the monetary policy front, the Bank of England meet this week with no change expected. The timing of interest rate hikes is likely to be pushed out against a backdrop of falling inflation.