Market Insight - Feb 18
By Bryn Griffiths (CEO, Edge Capital Markets)
Global equity markets ended the week relatively unchanged on the back of lighter volumes due to Chinese New Year celebrations throughout Asia. The Chinese market was closed for the entire week. Albeit a small gain of only 0.1% for the week, the S&P 500 has posted gains for the seventh week in a row and is up, along with the Dow Jones Index over 6% in the last 8 weeks. Driving this rise is continued economic data releases that keep surprising to the topside. This week saw better than expected US Retail sales (+0.2% vs +0.1%), Lower unemployment claims (341k vs 361k) and to close the week a solid Empire State Manufacturing Index (+10.0 vs -2.1) and the all important Consumer Sentiment (76.3 vs 74.8). The landscape of improving sentiment and low volatility (CBOE VIX is at 14.45 and has dropped 21% in last 8 weeks) is starting to bring some of the excess cash horded during uncertain times back into the market with the Merger and Acquisition market starting to appear again. Warren Buffets Berkshire Hathaway in Collaboration with 3G Capitals acquisition of H.J Heinz Co. (yes the Tomato Sauce maker) got the markets attention this week. Despite all this good news a reminder of that some of the volatility out there still remains was delivered when an email to executives from Wal-Mart’s vice president stated that “February Month to Date sales are a total disaster” and are “the worst start to a month I have seen in my ~7 years with the company”. Recent outflows from the European markets subsided this week as some larger companies released better than expected results. This was despite a worse than expected release of the European GDP figure (-0.6% vs -0.4%). As mentioned, Asia was quiet on the New Year holidays. With Asia back on deck this week, we should see increased flows in these markets.
Weekly Moves: Australia 200 +1.2%, Hong Kong +1.0%, Japan +0.2%, China +0.0%, France +0.3%, Germany -0.7%, UK +1.0%, Dow Jones -0.1%, S&P500 +0.1%, Nasdaq -0.4%
The US dollar saw inflows during the week with the US Dollar index closing up 0.3%. Again this was represented by mixed flows within each region. The NZDUSD rose and the AUDUSD fell and the EURUSD rose whilst the GBPUSD fell. The meteoric rise that the USDJPY has had over the last few months was halted somewhat this week as investors took profits in the lead up to the G20 finance heads meeting over the weekend. There were heightened risks that potentially some comment would ensue about the currency wars that appear to be brewing. Indeed this was the case with a pledge not to “target our exchange rates for competitive purposes”. It appears that the policy devaluing of a country’s currency is ok, but giving specific guidance as to target levels is not, is the essence of the statement. So expect the same stimulus to continue with perhaps slightly different wording around the currency positions. Japan, clearly in the target sights of this statement denied driving down their currency arguing that its fall was a by-product not a focus of their efforts (I hear a Tui’s billboard is being built at the moment – yeah right!). This week should see increased activity as the Asian markets awaken from their holidays and join the rest of us back at work.
Weekly Moves: AUDUSD -0.1%, GBPUSD -1.8%, EURUSD +0.0%, NZDUSD +1.5% USDCAD +0.8%, USDJPY +0.8%, USDCHF +0.5%
This week saw outflows of capital from the global bond markets as the world continues to see-saw between good news and average news regionally coming out of the global economy. This week was a good news week overall with yields up predominantly across the globe as continuing better than forecast economic results are released. The recovery in the US, in the eyes of investors, seems to be gaining momentum and therefore safe harbour in bonds is not required at the moment. Foreigners demand for US treasuries is on the rise again where it was reported that nearly US$30bln was bought in December – up from the US$26bln bought in November. To note this week was that Yields on Spanish and Italian bonds fell on belief that their debt issues could be managed going forward despite the looming Corruption allegations against Spain’s Premier Rajoy and Italian elections. ECB President Draghi was quoted as saying that Spain had achieved “enormous progress” and that data due in coming weeks will show “unprecedented fiscal consolidation efforts”.
Closing Yields (Weekly Move):
3m 5y 10yr 30yr
US 0.10% (+0.03%) 0.86% (+0.03%) 2.00% (+0.05%) 3.18% (+0.02%)
UK 0.36% (+0.01%) 0.97% (+0.03%) 2.19% (+0.09%) 3.43% (+0.08%)
Germany 0.05% (+0.00%) 0.66% (+0.03%) 1.65% (+0.04%) 2.44% (+0.06%)
Japan 0.10% (+0.03%) 0.14% (+0.00%) 0.75% (-0.02%) 1.94% (-0.06%)
Australia 2.88% (+0.03%) 3.04% (+0.05%) 3.52% (+0.04%)
Precious metals saw strong outflows this week as the US economic data releases this week moved investors away from the safe haven status of Gold. Some of the world’s biggest names moved out of precious metals on reduced safe haven positioning - it was noted this week that billionaire investors George Soros and Louis Moore Bacon cut their exposures to gold backed exchange traded products in the 4th quarter of last year. With the strong moves we have seen recently in equities and continued improvements in US economic data releases, investors are becoming more and more comfortable holding riskier assets. Silver was caught in the downdraft despite its higher levels of industrial demand that should see the Gold/Silver ratio fall in these improving times. Despite an improving global economic landscape copper closed the week down as well. This was somewhat a surprise however the metal is up nearly 6% in the last 12 weeks, so a pause before further upside is understandable. Weekly Moves: Gold -3.4%, Silver -5.0%, Copper -0.6%