Market Insight - Feb 25

MARKET INSIGHT
By Bryn Griffiths (CEO, Edge Capital Markets)

Equities

Global equity markets ended the week with mixed results. Many exchanged ended relatively unchanged but that did not represent the volatility seen as Federal Reserve minutes from their last meeting were released and showed a number of junior members wanting the FED to consider varying the pace of the US$85bln monthly bond purchases. It is probably important to note that the senior members remained resolute in their plan to bring unemployment down and continue the plan. I know where my money would be in that debate. This dissention gave the markets a wee wobble, but equally not surprising as the market really were looking for an opportunity to settle for a while following such a strong run in the first 2 /3 months of 2013. The key measure of volatility, the CBOE VIX rose nearly 3% this week. The Chinese market was the worst performing index this week closing down 4.85% on the back of increasing concerns that Chinese officials will start looking to tighten monetary conditions to manage the once again property market that is heating up. This impacted on heavy weight property and banking stocks. European exchanges closed the week with little fanfare as all eyes were focusing on the weekend’s Italian Election. There could be some interesting price action in the UK market when it reopens on Monday following the downgrading of their sovereign debt by Moody’s just prior to the US market close. Also looming this week is the March 1 automatic US spending cuts that were kicked down the road from the infamous Jan 1 deadline. Will we see any progress finally on this front?
Weekly Moves: Australia 200 -0.3%, Hong Kong -2.8%, Japan +1.9%, China -4.9%, France +1.3%, Germany +0.9%, UK +0.1%, Dow Jones +0.1%, S&P500 -0.2%, Nasdaq -1.0%

Currencies
The US dollar saw strong inflows during the week with the US Dollar index closing up 1.0%. The EURUSD closed the week down 1.4% on concerns around the outcome of the Italian Elections where it seemed the anti-austerity Berlusconi was gaining popularity as well as the fact that European banks returned less than forecasted funds borrowed during the second Long Term Refinancing Operation (LTRO). The banks returned EUR61bln vs an expected EUR122bln. This clearly indicates that European banks are still holding onto funds and therefore there are still perceived risks in the region in the eyes of the bankers. The biggest looser this week was the GBP which closed the week on its knees following the downgrade by Moody’s of the UK Sovereign Debt rating. The GBPUSD is now down nearly 6% in the last 8 weeks.
Weekly Moves: AUDUSD +0.1%, GBPUSD -1.8%, EURUSD -1.4%, NZDUSD -0.7%, USDCAD +1.6%, USDJPY +0.0%, USDCHF +0.9%

Interest Rates
This week saw inflows into all the global markets except Australia which saw selling across their curve following a somewhat neutral statement from Australian Reserve Bank Governor Stevens. The market had priced in over 50bp cuts to their cash rate by the end of the year. Gov Stevens said that there was a significant amount of stimulus in the system that was still working its way through, and that the current overnight cash target at 3% is appropriate. Concerns around the Italian election result as well as the less that forecast return of banks Euro’s borrowed for stimulus purposes saw safe haven buying of German bonds drive their yields lower for the week. The debate about the Federal Reserve pulling out its stimulus was ignored by the bond markets where the “Smart” money plays where yield remain subdued during the volatility experienced in the Forex and Equity markets. The US automatic spending March 1 date now looms and may see safe haven buying leading up to any outcomes.

Closing Yields (Weekly Move):
3m 5y 10yr 30yr
US 0.12% (+0.02%) 0.83% (-0.02%) 1.96% (-0.04%) 3.15% (-0.03%)
UK 0.38% (+0.02%) 0.86% (-0.11%) 2.11% (-0.08%) 3.37% (-0.06%)
Germany 0.01% (-0.04%) 0.56% (-0.10%) 1.57% (-0.08%) 2.40% (-0.04%)
Japan 0.08% (-0.02%) 0.14% (+0.00%) 0.73% (-0.02%) 1.92% (-0.02%)
Australia 2.90% (+0.02%) 3.07% (+0.03%) 3.54% (+0.02%)

Metals
Precious metals saw strong outflows again this week as continued positive global economic data releases saw investors no longer needing safe harbour and exited the precious metals market. This belief was supported by minutes from the Federal Reserve indicting members wanted to consider reducing their bond purchasing program suggesting that things were improving out in the economy. We have now seen Silver fall 8% and gold down 4.7% in the last 4 weeks. Copper tumbled this week as US and European manufacturing data releases missed to the downside.
Weekly Moves: Gold -1.8%, Silver -3.5%, Copper -5.0%

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