Weekly Market Update: July 11th 2016

Market Recap

Global equity markets were mixed last week as the major indices in the US outperformed their counterparts in Europe and Asia. Core government bond yields continued to confound, with the 10-Year German Government bond yield falling to -0.18%.

Stronger than expected monthly US jobs data from the Bureau of Labour Statistics on Friday helped spur a relief rally that pushed the major US equity indices into positive territory for the week. The report was heralded as “goldilocks jobs report”, not too hot, not too cold, just right! The report was strong enough to suggest the US economy is not headed for recession, but yet not strong enough to suggest the US Federal Reserve will be forced to raise rates in any material way in the near term. 

The reality is that too much cannot be read into one report. The latest release comes on the back of a string of weak reports in previous months. The market reaction to one piece of data is a sign that market participants are struggling to gauge the state of the global economy.

Strong Yen continues to weigh on Japanese shares….

In Europe, the FTSE Eurofirst 300 closed down -1.33% for the week. The German DAX index fell -1.50% while the French CAC 40 was down -1.95%.

The S&P 500 index ended the week up +1.28%, while the tech-heavy NASDAQ Composite rose +1.94%. The much quoted CBOE Volatility Index (VIX), the so-called ‘fear index’, a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, eased further, ending the week down -10.63%.

In Asia, Japan’s Nikkei 225 index fell -3.16%, the worst performing major index this year. While Japanese shares benefited from a weaker Yen in 2015, this dynamic has gone into reverse in 2016 as the Yen has continued to rise against its major currency counterparts. The Nikkei 225 index has dropped by -20.63% this year with the Euro and the US Dollar down -15.10% and -16.45% against the Yen over the same period, respectively.

Demand for perceived ‘safe-haven’ assets…..

Government bonds were in demand last week as markets moved to risk-off mode. With yields moving inversely to prices the German government 10-year bond yield fell 6bps to -0.18%. The UK 10-year treasury yield fell another 13bps to 0.74%, now down 122bps YTD.

The decline in yields continues to bring us new records in bond markets. Last week the Japanese 20-year bond yield turned negative for the first time. Even more extraordinary is the fact that the entire Swiss yield curve below zero, with yields negative out to maturities of 50 years!

The price per troy ounce rose +1.48% last week to $1,355.69. The precious metal is one of the best performing assets this year, up +27.61% YTD, amidst the increasing uncertainty around the outlook for the global economy and monetary policy.

Week Ahead

European equity markets have opened higher this morning after a positive session in Asia overnight. Japan’s Nikkei 225 index surged 3.8% as the Yen weakened on speculation of fiscal stimulus from the Japanese government.

On the macro front, there is a raft of data released from China this week, including first quarter GDP growth, retail sales and industrial production. The BREXIT result has taken the spotlight off China in recent months but questions remain on how authorities can transition the Chinese economy and avoid a credit crisis.

The Bank of England (BOE) will hold their monetary policy meeting this week. Rather than wait till the August meeting to cut rates, when the BOE would have more data to form their decision, Carney and his colleagues are likely to cut rates Wednesday to reaffirm their commitment to support the UK economy in this time of great uncertainty.