Market Insight - March 4
By Bryn Griffiths (CEO, Edge Capital Markets)
Global equity markets saw capital inflows this week with most exchanges squeezing out gains. The looming automatic US budget cuts that were to take effect from 1st March did not soften the markets appetite to buy stocks and to push the Dow Jones to its highest level since 2007. The theme of continued better than expected data releases out of the US economy have many feeling that the recovery is gaining traction. This week saw Conference Board Consumer Confidence (69.6 vs 60.8) and Revised University of Michigan Consumer Sentiment (77.6 vs 76.3) both print better than expected data releases which is critical for the core growth of the US economy. If the all important consumer is confident then the markets certainly benefit. These, along with improving pending home sales (4.5% vs 1.7%), falling unemployment claims (344k vs 361k) and a rising ISM manufacturing PMI (54.2 vs 52.7) paint a positive forward looking landscape in the US. However, given all this, it will be interesting to see what influence the fiscal drag will have going forward. Leading into what is a total spending package of US$1.2 trillion over nine years, with US$85bln occurring over the remainder of this fiscal year, at this stage its impact on consumers seems muted. The CBOE Volatility index jumped a whopping 9.7% this week up to 16.32 which indicates that investors concerns are on the increase. We have seen a 14% rise in this indicator over the last month. Asian markets performed the best this week despite a decline in the pace of growth of the Chinese Manufacturing sector last month. Commentators are attributing this slowdown to the impact of Chinese New Year celebrations so we will be watching the next release to see if a trend is forming. The outcome of the Italian Elections cast a cloud over the European markets this week with the broader Europe Stoxx 50 closing the week down 0.5%.
Weekly Moves: Australia 200 +1.4%, Hong Kong +0.4%, Japan +2.0%, China +1.9%, France -0.2%, Germany +0.6%,
UK +0.7%, Dow Jones +0.6%, S&P500 +0.2%, Nasdaq +0.4%
The US dollar saw strong inflows during the week with the US Dollar index closing up 1.0%. There were no real standouts this week with AUDUSD, GBPUSD, EURUSD and NZDUSD all falling between 1.2% and 1.5% indicating that the US was a favoured destination for capital flows. Concerns about the hung parliament in Italy and a deteriorating employment landscape in Europe saw the EURUSD fall 1.2% this week with its decline around 4.5% in the last 4 weeks. Continuing poor data releases from the region indicate that growth will not rebound any time soon. The AUDUSD and NZDUSD fell this week on a slight reduction in the pace of growth of the Chinese manufacturing sector and direct comments by both the RBA and RBNZ heads about the high levels of their currencies. USDJPY staged a recovery to close the week up 0.1% following the G20 finance meeting comments which seemed to allow Japan to continue its stimulus program but without making specific reference to USDJPY levels.
Weekly Moves: AUDUSD -1.2%, GBPUSD -1.4%, EURUSD -1.3%, NZDUSD -1.5%, USDCAD +0.4%, USDJPY +0.1%,
This week saw inflows into all the global markets as safe haven buying bought investors back into this market. European poor economic data releases and the unfavourable outcome of the Italian elections which left one of Europe’s largest economies with a hung parliament meant investors sought comfort in the bond markets. This saw German bonds in demand with their yields across the 2yr-30yr maturities down 10-16pts. Testimony from US Fed Chairman Bernanke indicating that he would keep supporting the US economy drove 10yr yields to their biggest fall in 6 months – down to 1.84%. Pressure is now building on both the Bank of England and the ECB to look at ways of re-igniting their economies. The March 1 automatic spending cut date passed without any substantial negative impact on the US Bond markets, so it seems there if a belief that they will whether the storm at this stage. Again, time will tell.
Closing Yields (Weekly Move):
3m 5y 10yr 30yr
US 0.11% (-0.01%) 0.74% (-0.09%) 1.84% (-0.12%) 3.05% (-0.10%)
UK 0.36% (-0.02%) 0.72% (-0.14%) 1.87% (-0.24%) 3.18% (-0.19%)
Germany 0.01% (+0.00%) 0.40% (-0.16%) 1.41% (-0.16%) 2.27% (-0.13%)
Japan 0.08% (+0.00%) 0.12% (-0.02%) 0.66% (-0.07%) 1.79% (-0.13%)
Australia 2.90% (-0.14%) 2.90% (-0.17%) 3.34% (-0.20%)
Precious metals saw outflows this week as investors start to digest what an ongoing reduction in US fiscal spending will have on inflation. At this stage the vote seems to be that deflationary forces are at play and this is no good for precious metals. It seems that it will take a few months before the reality of spending cuts kick in and whether any alternative agreement can be reached. Despite the fall in gold prices we continue to hear that central banks are continuing their purchases. Copper fell this week on a decline in the growth of the Chinese manufacturing sector. Both the HSBC and Official Chinese Manufacturing data releases missed to the downside. Copper has now fallen over 7% in the last 4 weeks.
Weekly Moves: Gold -0.3%, Silver -0.3%, Copper -1.0%