Global equity markets surged higher last week, as we were reminded once again that nothing really matters other than the actions of those benevolent central banks. The weaker than expected US jobs report the previous Friday provided the initial springboard for equities, pushing out expectations on the timing of rate hikes from the US Federal Reserve. Further support for this view was provided on Wednesday when the release of the minutes from the Fed’s most recent monetary meeting showed that committee members are still torn on when rates should rise.
The Greeks also played their part in the market exuberance, repaying €450 million to the International Monetary Fund (IMF) before Thursday’s deadline expired. The news was well received because it means that Greece are still playing ball in terms of meeting their debt obligations. However, a long term sustainable solution for Greece has yet to be agreed. With cash reserves dwindling and larger repayments ahead, some form of debt restructuring will be required, or an exit from the Euro will be the inevitable outcome.
In Europe, the FTSE Eurofirst 300 closed up 3.69% for the week, the highest level since October 2000, buoyed by renewed weakness in the Euro. Meanwhile, the German DAX index and the UK’s FTSE 100 both closed the week at record highs, up 3.40% and 3.75% respectively. The major US equity indices were within touching distance of record highs, with the S&P 500 rising 1.70% over the week. Japan’s Nikkei 225 index closed at a 15-year high, up 3.08%, while Chinese equities continue their rapid ascent. After lagging the mainland Shanghai equity index, Hong Kong’s Hang Seng index played catch up last week, rising 7.90%, the most since 2011.
One could be forgiven for thinking that the equity market rally in Europe must be depicting a rosier outlook for the Eurozone economy. Yet, European bonds continue to present a more sanguine period ahead. The German 10-Year government bond hit a record low of 0.14% on Wednesday before closing the four day week at 0.16%. Citi now have cut their target yield for the German 10-year bond to -0.05%.
European equity markets have opened broadly flat this morning after the major equity indices in Asia traded relatively flat overnight, except for China of course, which continued its upward trend!
The Shanghai Composite index of mainland shares rose 2.16% while Hong Kong’s Hang Seng index gained 2.73%, closing at the highest level since January 2008. The cause of the rally? Exports fell 14.6% in March, against expectations of a 12% increase. Remember, bad data = central bank action = rising equity markets! As I have written about previously, the slowdown in the Chinese economy has been sharper than expected, causing Chinese equities to shoot up on the prospect of more aggressive monetary policy from the People’s Bank of China. This is same old easing story! Still, financial markets may be underestimating the extent of the slowdown and the limits of monetary policy. This Bloomberg article “We Travelled Across China and Returned Terrified for the Economy” on what one of their analysts made of his tour of China is concerning.
On the macro front this week there are reports on industrial production, retail sales, employment and inflation from around the globe. There is a host of data released from China including the initial estimate of first quarter GDP growth. All eyes will be on Mario Draghi on Wednesday at the ECB press conference, following the latest monetary policy meeting. No change is expected, but I suspect Draghi will be talking up the immediate impact of QE, and how it is working. Hilary Clinton yesterday formally announced her US presidential bid with her tweet “Everybody needs a champion. And I want to be that champion”. Backed by more than $1 billion in corporate donations she will take some stopping. Ya gotta love democracy!