Asking the Right Questions
Global equity markets continue to struggle, with all of the major equity indices ending lower for the week. Europe and Asia underperformed the US, with the currency backdrop playing a huge part in the divergence of returns this year.
Concerns about the momentum behind the global economy continue to dominate the headlines. Declines across many of the major commodities also weighed on markets, the price of a barrel of Brent Crude oil fell -3.28%.
The situation in Greece has resurfaced with the IMF reportedly pushing for debt relief for Greece from other member states. The Greeks need the next tranche of their bailout funds to pay €3.5 billion of debt repayments coming due in July. Negotiations will continue this week.
In Europe, the FTSE Eurofirst 300 Index fell -2.93%. The German DAX index ended the week down -1.68%. Heavily weighted to energy, the UK’s FTSE 100 Index fell -1.86%, as the rally in oil prices faded last week. In the US, the S&P 500 index was down -0.40%.
In Asia, Japan’s Nikkei 225 index continued to fall, dropping -3.36%, as the strengthening yen effects Japanese shares. China’s Hong Kong listed shares underperformed mainland Chinese shares, with the Hang Seng index ending the week down -4.54%.
Government bond yields moved lower across the board last week as markets moved to risk-off mode. The German 10-year bond yield declined 13bps to 0.15%. The UK 10-year yield saw the biggest move, down 18bps to 1.42%, while Japan’s 10-year government bond fell 3bps to -0.11%.
In the US, the key data released on Friday provided additional support for the more dovish members of the US Federal Reserve’s FOMC committee who are reluctant to move ahead with further rate hikes this year. Despite the increase in hourly earnings, the focus was on the 160,000 non-farm payroll jobs added in April, below the consensus estimate of 200,000, with a small revision of the data for the previous two months. The initial reaction in US equity markets was negative, but the major indices retraced losses to end the day in positive territory.
While there are concerns about a loss of momentum behind the global economy, mixed data that will keep the US Federal Reserve from raising rates is being seen as a good thing. There is a preference among many market participants for the Fed be 110% sure that the US economy – and now the global economy since Fed Chair Janet Yellen expressed concerns about global risks in one of her recent FOMC statements – is ready for the next rate hike. The markets are effectively pricing in little chance of a rate hike in June, and it is now little less than a flick of a coin whether we will see a rate hike at all in 2016.
On Tuesday the European Commission released the “Spring 2016 Economic Forecast”, downgrading their outlook for growth and inflation in the Eurozone. While the 2016 GDP forecast was cut marginally to 1.6%, from 1.7% in February, their inflation forecast was slashed from 0.5% to 0.2%.
“External price pressure is also weak due to the slight appreciation of the euro and overcapacities in several emerging market economies that are holding back global producer prices. At the same time, core inflation has so far failed to show an upward trend, as moderate economic growth and subdued wage developments have kept a lid on domestic price dynamics. Inflation in the euro area is therefore set to remain very low for longer than previously forecast and the projection for inflation in 2016 has been revised downward to 0.2%.”
Remember, the European Central Bank’s (ECB) mandate is driven by an inflation target of 2%. This is why Super Mario Draghi has pursued more aggressive monetary policy, entering the realm of quantitative easing (QE), despite German opposition. However, inflation expectations continue to fall in the Eurozone. The argument is that made the situation would be much worse if central banks did nothing. Since we can only speculate on the alternative, it is an argument which only has one winner. Hence, why we are likely to see the ECB and other central banks continue to experiment with monetary policy.
The Eurogroup of finance ministers will meet on Monday, with Greece high on the agenda. After last week’s weaker than expected jobs report in the US, retail sales on Friday will be keenly watched. The second estimate of first quarter GDP for the Eurozone is released the same day.
On the monetary policy front, the Bank of England (BOE) will hold their monetary policy meeting, with no change in policy expected. The Bank of England will also release the minutes from the previous meeting and the latest quarterly Inflation Report, which sets out detailed economic analysis and inflation projections used in the decision making process when setting monetary policy.
The US elections are heating up and it looks increasingly likely that ‘The Donald’ will be the Republican nominee, much to the ire of many staunch Republicans. For them, the choice between Donald Trump and the likely Democrat nominee, Hilary Clinton, is akin to the choice which faced Gary Neville back in 2014 when Liverpool and Manchester City were vying for the Premier League title. “It’s like having a choice of two blokes to nick your wife”. The clip never gets old, click for link>>>.
Equality of pay remains a contentious issue. For a more light hearted perspective on this issue on a Monday morning, check out this video excerpt from a TED talk by “Frans” de Waal, PhD, a Dutch primatologist and ethologist. Click for link>>>