Investment markets and key developments over the past week
The “risk off” tone in markets continued over the past week with mixed US economic data and earnings results along with a continuing fall in oil prices early in the week maintaining downwards pressure on US shares which fell 1.2% for the week, Japanese shares which fell 1.9% and Australian shares which lost 3%. Bonds benefitted from a flight to safety and deflation worries with yields continuing to fall. However, European shares bucked the trend and gained 4.6% over the last week on expectations for European central bank (ECB) quantitative easing and Chinese shares rose 2.8%. While the Euro continued to slide against the $US, the $A managed a small gain helped by a strong jobs report.
While US shares remain under pressure, falling 1.9% year to date, European shares have been outperforming and are up 1.8% year to date reflecting expectations the ECB will announce a widening in its quantitative easing (QE) program at its January 22 meeting. Expectations on this front were boosted by an opinion from the European Court of Justice that ECB sovereign bond buying does not violate EU treaties and by the Swiss central bank (SNB) abandoning the 1.20 currency floor for the Euro against the Swiss Franc.
Switzerland is a small country so it’s hard to get too excited by the surge in the Swiss Franc and fall in Swiss shares (unless you were the wrong side of those moves) that resulted from the SNB’s action. That said there are some global implications. First, it provides a reminder that such exchange rate fixings are hard to sustain. Second, it demonstrates there is more scope for negative interest rates in the face of deflationary pressure globally with the key SNB interest rate being cut to 0.75%. Third, and related to this, it highlights that other small countries may be forced into further monetary easing if ECB QE pushes their currencies higher. Finally, it likely reflects SNB expectations that the ECB is about to expand its QE program.
For Australia, the Swiss gyrations underline the problem that outside the US lots of countries would like to get their currencies down, making it harder for the $A to fall on a trade weighted basis which in turn means it will have to fall further against the $US.
Shock, horror, the World Bank revises down its global growth forecasts – but nothing new! Over the last few years organisations like the World Bank, IMF and OECD have been forecasting a pick-up in global growth to around 4% or so, only to revise estimates down to around 3-3.5%, usually well after smart investors had already allowed for it. The World Bank kicked off the process again for this year, shaving its 2015 global growth forecast to 3.6% (against our own view of 3.5%) and continuing to expect a bounce to 4% in 2016 (which is probably again too optimistic). There is nothing new in this. In fact, I prefer a world of constrained and uneven growth because the opposite of strong and synchronised global growth would only mean an increased risk of overheating, inflation and monetary tightening.
But while there is no reason for alarm at the latest World Bank revisions, the plunge in bond yields is worth keeping an eye on. US 10 year yields are now zeroing in on their 2012 lows and in other countries have fallen below 2012 levels to record lows. This includes Australia. While the bond markets could be over-reacting again like they did in 2012 and setting up for a sell, which is my base case, they are also providing a reminder that deflation is more of a threat than inflation.
Full article, please click here: Weekly Market Update – 16 January 2015