Weekly Market Update: May 3rd 2016

Market Recap

Global equity markets were back in the red last week, after ending on a sour note Friday. Concerns over the global economy have not gone away, while earnings season has so far been mixed, most notably for some of the high profile technology companies who have failed to meet lofty expectations. Apple, the long term market darling, is now the “Dog of the Dow”, the worst performing stock in the Dow Jones Industrial Average in 2016.

The fickle markets were also put out by the Bank of Japan’s (BOJ) decision not to add further monetary policy stimulus on Thursday. Rather than introduce new measures at their latest monetary policy meeting, Haruhiko Kuroda, BOJ Governor, and his colleagues choose to hold fire and allow time for their previously announced measures to take hold. For a world hooked on monetary stimulus, there will never be enough stimulus.    

In the US, the advance estimate of first quarter GDP raised doubts over the strength of the US recovery, with the world’s largest economy growing at an annual rate of 0.5 percent in the first quarter of 2016, compared to 1.4 percent in the fourth quarter. However, the first quarter is historically weak relative to other quarters, so the data must be interpreted cautiously. Either way, the US Federal Reserve remains concerned enough to delay further interest rate hikes, holding rates steady at their meeting last week.

One bright spot was the better than expected first quarter Eurozone GDP growth. However, consumer price inflation moving back into negative territory, -0.2% in April from a year earlier, stole the limelight in Europe.

Equity markets end the week on a sour note…..

In Europe, the FTSE Eurofirst 300 closed down -2.14% for the week. The German DAX index fell -3.22%, after falling more than 2% on Friday.

The S&P 500 index ended the week down -1.26%, while the tech-heavy NASDAQ Composite fell -2.67%. 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, jumped +18.76%.

In Asia, the Nikkei 225, the worst performing major index, fell -5.16%, driven by BOJ’s decision not to ease policy further and the resulting surge in the Japanese Yen. The Euro and the US Dollar were down -2.20% and -4.02% against the Yen, respectively, last week.

Gold continues to shine in face of uncertainty…..

Yields on European core government bonds moved higher last week, amidst new debt sales. The German 10-year bond yield rose 5bps 0.28%.

Gold remains in favour against a backdrop of increased volatility; the price per troy ounce rose +4.09% last week to $1,256, up +21.65% YTD.

The recovery in oil prices continues despite concerns over the growth outlook for the global economy, with the price of WTI crude oil rising a further +7.53% last week, to $45.98 per barrel.

Week Ahead

European equities have opened lower this morning, with disappointing earnings from a number of major banks blamed. The Reserve Bank of Australia made a surprise 25bps cut to their key interest rate overnight, to a record low of 1.75%. A long way from the zero or negative rates in Europe, but more rate cuts are expected from Australia’s central bank as they face their own fight with falling prices.

As a commodity producer heavily reliant on Chinese demand, the Australians will be hoping China can avoid a hard landing, but they themselves have to worry about their own hard landing, in their debt fuelled property sector. Further rate cuts will likely serve to push prices higher, risking an even harder fall when the bubble eventually pops.

Key macro data this week includes purchasing manager index (PMI) reports from around the globe. In Europe, the latest retail sales data will be released. In the US, the employment situation report will be keenly watched on Friday, providing an update on the labour market, a key indicator for US monetary policymakers.

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Victory for the underdog

Leicester City, Champions of the English Premier League. Leicester City, Champions of the English Premier League! Sometimes there is no explanation. Inspirational, on so many levels.

Off the pitch there was another victory for the underdog last week, the families of the 96 Liverpool supporters who died in the 1989 Hillsborough disaster. For 27 years they fought against the establishment who sought to hide the truth. Last week, these families got their reward with the court ruling that the 96 victims – their family members – were “unlawfully killed”. The police, not the Liverpool fans, were to blame. An underdog standing up to the establishment in Britain, their resilience and determination for justice could not be quenched. It will not bring back their loved ones, but it may help these families to start the process of moving on.  YNWA