Market Commentaries 2016
The FTSE 100, the UK’s blue chip index of leading companies, finished the year at a record high of 7,142.83, some 13 points higher than the peak set in October. The final surge in the index owed much to the rise in international companies with non-Sterling revenues and mining stocks in particular. A late rise in the price of Brent crude also lifted the oil sector stocks. There was also broader support for the index as post-Brexit economic data continued to come in better than expected. Underlining all of this, was a an optimistic outlook for the US economy at the prospect of tax cuts and infrastructure spending.
For the second time in a decade the US Federal Reserve has raised interest rates by a quarter point from 0.25-0.5% up to 0.5-0.75%. This is in response to a strong year of growth for the US economy with near full employment and rising inflation expectations. As the Fed approach inflation and unemployment targets the expected path of rate rises for 2017 was increased to three quarter point hikes from the previous two. Global markets had largely priced in this move and have reacted cautiously to the news with the S&P coming off 0.8% and US government debt yields rising to 1.26%. The dollar rallied on the increased expectations of more rate rises in 2017. The European open remains cautious as markets look to the Bank of England who are set to announce near term interest rates.
Data showing the number of new jobs added in the US economy over November came in at 178,000 jobs created with unemployment in the world’s largest economy falling to 4.6%, a level not seen since 2007. The headline figure of 178,000 came in just shy of economists’ predictions of 180,000 and well ahead of Octobers figure of 142,000. This positive number will only serve to re affirm market speculation that the FED will raise interest rates in the US on the 16th of this month which is already running at a 100% probability.
In the Autumn Statement released today, Philip Hammond set out plans to boost the UK’s economic growth, following the referendum result to leave the EU earlier this year. The Office for Budget Responsibility (OBR) forecasts growth in 2017 of 1.4%, down from 2.2% expected in March, driven by higher inflation hitting consumer demand and continued economic uncertainty affecting business investment. OBR forecasts growth of 1.7% in 2018, 2.1% in 2019 and 2020 and 2% in 2021. Hammond targeted struggling families through a rise in the National Living Wage to £7.50, an increase in the generosity of Universal Credit and a rise in the tax-free personal allowance to £11,500. He also announced plans to increase spending on innovation and infrastructure over five years, including new affordable housing and transport networks. The announcement of an increase in public sector net borrowing requirements moved the UK 10-Year Gilt up to 1.43%, whilst the FTSE 250 index extended earlier gains.
Republican nominee Donald Trump has today upset global markets by winning a historic election race to become the 45th US President elect. Polling in the US on Wednesday had Democrat candidate nominee Hillary Clinton holding onto a small but sustained lead. Overnight voting across the US sharply corrected that lead to put the Republican candidate nearly 20% out in front. Wednesday trading saw stock markets tentatively pricing in a Clinton victory are now rushing to correct this position with US stock markets, the Mexican peso and the Japanese Nikki 225 falling sharply. The Republican party has also taken majority control of both the Senate and Congress which will prove instrumental in enabling the president to push through legislation. Markets are expected to experience a significant amount of volatility over the short term in reaction to this truly historic vote.
FBI director James Comey has announced there will be no further action taken against Hillary Clinton over her use of a private email server. The news has come just ahead of Tuesdays presidential election which has Democratic representative in front by a small margin. Markets have reacted to this news positively with early trading seeing a risk on market with equities rallying at the expense of haven assets such as gold and the Japanese yen. Markets still remain cautious ahead of what is set to be a very close election.
The number of new jobs added to the US economy in October fell short of expectations today, coming in at 161,000 new jobs compared to the forecast 173,000, yet still represents a solid number. At a policy meeting this week, the US Federal Reserve said that they were awaiting a key data release to strengthen the case for a December rate hike, and markets are taking this release as that sign that the opportunity for a December hike is still there. Expectations for the hike have now risen from 76% to 80% off of the news.
The Bank of England (BoE) has increased its forecasts for growth and inflation next year, expecting inflation to hit 2.7% which is almost triple the current rate of 1%, while economic growth is forecast to rise to 1.4% from 0.8%. This was indication that the option of a further interest rate cut this year is almost certainly off the table. Drivers of this sharp increase in inflation expectations are the slide in the pound since the EU referendum, increasing the cost of imports, as well as the rise in the price of oil since early this year. The pound, which had received a boost earlier in the day after the high court ruled that parliament should have a say over the triggering of article 50, strengthened further against the euro and the dollar after the BoE’s statement.
The British High Court has today ruled in favour of UK government needing parliamentary approval to trigger Article 50 – the mechanism for leaving the EU. Initial market reactions have been in favour of buying domestic UK elements of the market with a rally in the FTSE 250 and UK sovereign debt. With the majority of MPs wishing to remain within the EU, the news sets the stage for further political turbulence as MPs will be faced with either upholding the democratic will of the people, or voting to block the Brexit vote which could be seen as a violation of the peoples' vote to leave.
The most controversial US election in American history was again thrown deeper into speculation with an announcement from the FBI that they would relaunch another investigation into Clinton’s use of a private email server during her time as sectary of state. Director James Comey has come under heavy criticism for the timing of the announcement which violates a DoJ policy about taking law enforcement actions against running candidates within 60 days of an election. Hillary Clinton’s lead over Trump in recent polls had been growing, however in the wake of the new investigation that lead has declined over 70%. Polls now have Hillary’s lead over the Republican at just 1 point.
Third quarter GDP growth has come in at 0.5%, up significantly from the consensus 0.3% forecast, putting the UK's annual GDP figure at 2.3%. This contrasts with the Bank of England prediction that Brexit would have a negative impact on the UK economy in 2016 and will likely add strength to Sterling throughout the day. The currency will remain volatile, however, with initial gains against the US dollar immediately after the news already subsiding to an extent. Whilst some are arguing that the economic effects of the June 23rd vote will take longer to filter through to the economy, this is certainly reassuring news in the short-term. Considering this level of growth surpasses that of several quarters over the last two years, it speaks to the resilience of the UK economy that it can generate growth in such testing times.
M&G has announced a resumption in dealing in the M&G Property Portfolio and its feeder fund, which will take place on Friday 4th November. During the fund’s suspension, manager, Fiona Rowley, has been selling properties in a controlled manner which has enabled her to increase the fund’s cash position. They now believe the fund has sufficient cash to meet likely redemptions and are therefore planning to open in less than two weeks. All buy and sell orders placed during the period of suspension will be processed as normal at the same valuation point for their respective share class.
Inflation has reached an almost two year high in the UK, following a release of data from the Office for National Statistics. The department reported that the cost of clothing, fuel and hotels were among the leading contributors to the rise in the Consumer Price Index (CPI) that has marginally exceeded forecasts. Apparently, the rise was offset by a fall in food prices, despite the likelihood they will rise in the near future, and so too by cheap air fares. This comes after the Bank of England announced that it is willing to tolerate ‘a bit’ of overshoot in the UK’s 2% annual inflation target. This move upwards, fuelled by the fall in Sterling, represents an expected sustained reversal of the downward trend in annual inflation that has persisted since 2011.
UK government bonds were being sold off today, pushing yields up substantially and quashing any prospect of a further rate cut this year from the Bank of England. Yields move inversely to bond prices and represents the government’s cost of borrowing. Following the decline of Sterling after Brexit, higher import costs along with other factors such as energy and commodity prices are expected to push inflation above the 2% target next year. If inflation continues to rise strongly, the Bank of England will likely be forced to look at raising interest rates next year. Meanwhile, the case for the Federal Reserve raising US interest rates in December, or early next year, intensifies. Hilary Clinton appears increasingly likely to win the Presidency and markets view her as the best option for American economic prosperity.
Along with the flash crash in the pound towards the end of last week the UK 10-year yield on government debt briefly spiked over 1% showing signs of market stress towards the UK economy and its ability to negotiate its exit from the Eurozone. Short term investor sentiment seems to be closely linked to economic data and rhetoric from the UK and European governments surrounding Brexit negotiations. The outcome of these negotiations appears set to be the driver of investment sentiment towards UK indexes over the short to medium term.
Thanks to a weaker pound following Brexit, UK manufacturing has enjoyed a strong performance since June, returning to levels of growth last seen in 2014. The data released today from Markit measures the general health of the sector by examining factors such as new orders, inventory levels and employment. The results exceeded what many analysts and politicians were expecting amidst a sceptical post-Brexit environment, with a figure that suggests tangible expansion in the sector. Reassuringly, performance has been boosted by demand from all over the world – not just the EU – boding well for Brexit as we go forward. TAM have welcomed the news in particular as we put conviction behind investing in UK economic strength and have allocated weighting into UK companies accordingly. As uncertain markets wait for any clues they can get over how Brexit will unfold, today’s news will hopefully add some positivity to investor sentiment and make future interest rate cuts less likely.
Markets reacted overnight to the 1st of 3 presidential debates that was widely recognised as a victory for secretary Clinton who appears to have edged her lead over the republican nominee. The debate covered economics, trade, race and national security with Mrs Clinton succeeding in confronting some of Mr Trumps more elusive policies. Overnight trading after the debate saw the Mexican peso rally along with the Canadian dollar as markets saw the risks associated with Donald Trump getting into the White house abated slightly, S&P futures indicate the US market will open up in today’s trading.
In as many weeks the second UK Bricks and Mortar fund is set to lift the dealing suspension put in place on the 4th of July. Standard Life UK property fund will lift its dealing suspension on the 17th of October which is 2 months ahead of its predicted re opening. The managers of the fund believe the UK commercial real estate market has sufficiently stabilised to allow the fund to re-open its dealing book with sufficient liquidity to meet its redemptions. The fund remains at a yield of over 4% and is confident in retaining that figure throughout the remainder of 2016.
In the wake of the Bank of Japans meeting the US federal reserve have voted in favour of keeping near term interest rates on hold at 0.25% - 0.5%. Out of the 10 central bank rate setters only 3 voted in favour of raising rates in September with all 10 agreeing that the case for raising rates had indeed strengthened. Markets rallied off the back of the news taking this as an indication a potential rate rise is looking more likely in December after the US presidential election.
Overnight markets in Asia have been rallying off the back of the most recent Bank of Japan meeting where the central bank decided to keep interest rates on hold at -0.1% but stated that this would be lowered if needs be. The country’s quantitative easing package has remained on track at 80Tn Yen with no immediate increase. The Yen weakened by 0.9% overnight with the Nikki 225 rallying 1.9% over the same period. Markets have seen the news largely as a positive sign of health for the Japanese economy with futures markets indicating that European and US markets will edge higher over today’s trading.
This week has seen the announcement by Columbia Threadneedle of the re-opening of its suspended UK Property fund. The announcement comes after the managers decided that the market is looking more stable, more liquid and that the attitudes of investors is more positive. We are confident that this will set the president for other suspended property funds to re-open in the coming weeks and months, with comments today from M&G’s property fund manager, Fiona Rowley, supporting this. She says that the group now hopes to lift the suspension of their £4.4bn Property Portfolio next month once cash levels are above 15 per cent (currently at 7.8 per cent). This would mean that fair value adjustments are no longer necessary and the funds would revert to established valuation policies.
EU equity and Gilt markets were down today after the European central Bank announced that interest rates for the eurozone will be kept at the present level until March 2017 when the current €80bn a month QE programme is set to finish. ECB President Mario Draghi indicated the QE program was more effective than ever and credit was finally filtering down to the real economy. Despite this, EU markets reacted negatively as investors took the news as an indication that the sentiment towards European growth was still tentative but not negative enough to warrant further stimulus. If ongoing data disappoints then the possibility of further rate cuts and an extension to QE remain clear possibilities.
US payroll data fell short of expectations in August, rising by 151,000 as opposed to the 180,000 expected and down from 275,000 the month before. The unemployment rate was unchanged at 4.9 per cent, slightly higher than the 4.8 per cent expected. The report came at a critical time, as the Federal Reserve are keeping a close eye on the jobs numbers ahead of their next meeting at the end of this month. This mild data suggests that the Fed is less likely to raise interest rates and led to a sharp fall in the dollar and short-term government bond yields. However they did recover some ground, with analysts optimistic that economic growth in the US is continuing, which could be sufficient to push the Fed to raise rates in December.
Though Janet Yellen has signalled that the case for an increase in the federal funds rate has strengthened in recent months, it would not appear that the threat of inflation is so strong as to justify raising rates now, ahead of the election. This stance is broadly in line with what bond markets were pricing for. For now the fed reserve seem content to sit back and watch the labour market conditions and would be happy to see a pickup in wages to justify their 2% inflation target, although clearly there are many in the market that think that a rise in this target to 3% may ultimately follow as the fed looks for alternative ways to stimulate the economy. The US stock market rose a modest 0.5% on the news, which is broadly in line with market expectations.
Data releases today show that UK unemployment has held at 4.9%, with July seeing an unexpected drop in jobless claims by 8,600. Job vacancies continued their downward trend, falling 7,000 in the three months through July. These data demonstrate companies generally showing resilience after the UK’s vote to leave the EU in June, however, as with the inflation data released yesterday, it is likely to take some time for the true fallout from Brexit to feed through. Softening economic data and increased uncertainty will likely take its toll on the UK labour market over the coming months when the full post-referendum employment picture emerges.
The first set of fully post-Brexit consumer and producer prices data have today been released, which show the UK’s inflation rate, as measured by the Consumer Prices Index (CPI), rising from 0.5% to 0.6%, roughly in line with expectations. Though the figure fully captures the month of July, it would be premature to assume that this rise in inflation is the result of the UK’s decision to leave the European Union pushing up the cost of imports for manufacturers. The rise in input prices to 4.3% in the year to July, compared with a fall of 0.5% in the year to June, is more likely due to rising fuel prices feeding through to manufacturers. The pound is up, now trading at $1.2989 and the UK 10-year gilt is up at 0.54.
The Labour market in the US surprised global markets yet again with another bumper Jobs figure of 255,000 easily beating analysts’ forecasts of 180,000 for July. The US benchmark reached new highs on Friday as investors saw the figure as further evidence the world’s largest economy is firmly on the path to recovery. Against the back drop of global turmoil the FED remain tentative about the next interest rate rise in the US and July’s figure will certainly play a large part in the next FOMC meeting in September.
The Bank of Japan today voted to keep interest rates on hold at -0.1% and keep its asset purchasing programme on course at Y80tn dashing hopes of a further Y28Tn increase on the current package. The BoJ did vote in increase its ETF purchasing programme by Y2.4tn and doubled the size of its USD lending programme with a commitment to further review the entire package at the next meeting. The Nikki 225 retreated 1% on the news and the Yen rallied 1.8% against the dollar as markets saw the announcement as underwhelming.
Though the Federal Reserve are optimistic that the near-term risks to the US economy have diminished, they have held steady on raising interest rates for at least another two months due to inflation remaining below the bank’s 2% target. Federal interest rates remain unchanged at 0.25% to 0.5%, again, marking a dramatic shift in expectations of four rate rises at the start of the year. The Fed will meet three more times this year- September, November and December, with most analysts expecting an increase at its next meeting in September.
The PMI survey of economic activity released today by Markit showed the biggest drop in 7 years. The figure came in at 47.7 and was significantly lower than the consensus forecasts of 49. A figure below 50 indicates a slowing economy. The figure was the worst since April 2009 when the UK economy was still struggling in the wake of the global financial crisis. Sterling weakened over 1 per cent against the US dollar to $1.314, lifting the prices of FTSE stocks with US dollar earnings, but the stock market rose generally as the poor data raised expectations that the Bank of England will cut interest rates and reaffirm their stated intention to step in to stimulate the economy.
The ECB has chosen to make no policy changes at the first meeting of its governing council since the EU referendum and the UK’s Brexit decision. They have chosen to wait at least another six weeks to assess the economic and financial market developments and the impact of Brexit on growth and inflation. ECB President, Mario Draghi, did however, make it clear that the ECB is “ready, willing and able” to act if needed. Market reaction has been minimal, as this announcement was expected, with the euro slightly up against the US dollar, reaching a daily high of $1.106.
The Bank of England has voted overwhelmingly to keep interest rates on hold at 0.50%. Only one MPC member voted in favour of a move to lower the national interest rate by 0.25%. Both UK Gilt and Equity indexes sold off in the wake of the announcement, as markets widely expected a 0.25% reduction as a pre-emptive move to provide fiscal stimulus for the UK economy post the historic decision to leave the Eurozone. Markets are now looking forward three weeks to the BoE’s August meeting where they believe the central bank will have had time to digest a few more data points and economic indicators before making the 0.25% cut.
Non-farm payrolls data showed US employers have added a net 287,000 jobs in the month of June, around 100,000 more than market predictions and significantly more than the 38,000 figure for the month of May. The unemployment rate rose as forecast by one tenth of a percentage point to 4.9 per cent. These figures strengthen the argument that May’s figure was an exaggeration as to the slowdown in the US labour market and increases the likelihood that the Federal Reserve will hike rates when they next meet. This release is positive and suggests that growth is not being dampened by the heightened uncertainty caused by the UK’s vote to leave the EU. Stock markets reacted positively to the news, quick to discount the positive news on the US economy.
M&G have joined Standard Life Investments in suspending trading on their £4.7bn and £2.9bn property funds, respectively, as of 12pm on 4th July. In anticipation of liquidity problems, we began reducing our positions in both funds at the start of the year, allowing us to lock in profits and retain a higher cash weighting ahead of the EU referendum. We have, however, retained some ‘tail’ positions in these funds which are backed by some of the biggest fund houses. While we have been informed that it may take up to 6 months to reverse the suspension, we remain confident that these funds will be able to withstand the pressures exerted on this asset class as a result of the widespread contagion caused by the UK vote to leave the EU.
What seemed to many as unthinkable has, become a reality. In a truly watershed moment, both politically and financially, the UK has chosen to leave the European Union after 43 years of membership. The decision by the UK electorate to begin proceedings to extricate the UK from the union will take up to two years and the outcome has predictably caused reverberations across global markets with the pound falling 10%, global volatility spiking and UK, european markets dropping sharply. This is largely down to the implied economic impact on both UK and global economic growth over the next 2 years and beyond as the UK removes itself from the eurozone. UK Gilts seen as a safe haven asset against the volatility in stock markets saw yields on the UK 10yr moving to historical lows below 1%. Whilst the outcome means choppy markets over the short term, we remain confident that there are still a wide range of opportunities for investors who are willing to keep a longer term investment outlook. As always we will continue to follow events closely.
The ECB has today begun their Corporate Sector Purchase Programme (CSPP), whereby they will be buying investment grade Euro-denominated bonds issued by non-bank corporations. While it is not known exactly what bonds the ECB will be buying, analysts have speculated that the focus will fall initially on utilities, which account for the largest proportion of the market. They have also estimated that the ECB will likely purchase roughly 3bn-10bn Euros per month. This is significant, as it represents genuine support for Euro bonds and is of a scale similar to that of the US when they undertook their QE programme. After the announcement, the Euro corporate bond market rallied and average yields fell back below 1 per cent. The Euro also strengthened against both Sterling and the US Dollar. We expect that this fall in yields is likely to continue over the coming weeks.
US non-farm payroll figures for May were released today at just 38,000 jobs created over analysts’ expectations of 162,000. Despite the overall unemployment figure for the US being at its lowest since 2007 this latest figure has come in under the markets expectations. The figure has dramatically reduced anticipation of a June interest rate increase as well as causing 10 year government debt yields to tumble across the globe with equity markets and the dollar witnessing a sharp selloff. Economists have warned that freak weather and large scale strikes in the US will have caused some dispersion to reliability of May’s figures.
Consumer prices in the US rose by 0.4 per cent in April, the highest level they have been in three years and exceeding expectations of a 0.3 per cent rise. The contributors are rising energy and food prices, up by 3.4 and 0.2 per cent respectively. These inflationary pressures have brought discussions over the next Fed rate rise back into the spotlight and led investors to review their timing for the next rise, with some pushing forward their expectations to a June hike. This led to a drop in US stocks, given the prospect of higher interest rates, whilst the US 10 Year Treasury yield, highly sensitive to inflation, was up at 1.78 per cent.
The annualised growth rate of Japan’s economy in the first quarter of 2016 has surpassed expectations, growing at a rate of 1.7 per cent compared to the 0.3 per cent that was expected. This is likely to have eased pressure on Prime Minister Shinzo Abe, who was prepared to increase fiscal stimulus if the data was bad. However, this also means that bad news is not good news for the market that was expecting a poor reading to urge the Bank of Japan to begin additional easing measures. This has led to concerns that fresh stimulus may be delayed. Nonetheless, faster than expected growth whilst the Yen remains strong and with a slowdown in China suggests that Japanese consumption remains strong, despite weak levels of business investment. Japanese markets seesawed following the announcement which reflects the fact that the outlook for Japan remains uncertain, whilst the Yen weakened against the Dollar.
A number of UK property funds have made a switch in their long-term pricing basis, lowering the price offered to investors wishing to withdraw money, who will now receive the mid or bid price rather than the offer price. This can result in a 4.5 to 6 percent reduction. These include the M&G Property Portfolio, Henderson UK Property and SLI Ignis UK Property funds. This is following the recent turnaround of net flows from positive or broadly neutral to negative, as property price rises are slowing and Brexit uncertainty remains. The funds have emphasised that the move is about being fair to transacting clients and to existing investors and not due to liquidity issues. With this said, we aggressively cut our property positions a month in advance of this, as we felt it prudent to move to a more modest exposure to property given our concerns over such pricing or liquidity constraints. Our portfolios were therefore protected from the full brunt of this change in pricing.
The US has seen a deceleration in growth over the first quarter of 2016, compared to growth in the last quarter of 2015. GDP rose at an annual rate of 0.5 per cent in the first quarter, below forecasts of 0.7 per cent and less than half the rate rise of the last quarter of 2015. A fall in corporate investment driven by energy companies suffering from the low oil price and a deteriorating US trade deficit contributed to this lacklustre GDP growth figure. Nonetheless, there is a steady improvement in the jobs market which signals a healthy economy despite this latest release.
Bank of Japan governor Haruhiko Kuroda chose to keep policy on hold, despite analysts’ predictions of further monetary easing given a weakening inflation outlook and the Yen which continues to strengthen, hurting exporters and damaging business confidence. Mr Kuroda’s defense was that he felt it was too early for another round of easing, after having only recently implemented the negative interest rate policy, which is expected to have a larger effect over time. The Yen jumped to Y108 against the Dollar after the announcement, considered by many analysts as not having anything to do with Japan, rather a flight to safety following bad news about the global economy.
The price of Brent crude dropped $2 to $41 as trading opened on Monday following a failure of the Doha talks to end in agreement to freeze oil production. It had been hoped that after failing in December, that the OPEC producers may have found some common ground in order to better negotiate with non-OPEC producers like Russia. However, Iran, who have recently boosted their export forecasts didn’t even send a delegate to the talks, further undermining hopes that some progress had been made behind the scenes over the last few weeks. The fall in oil triggered a rush to safer assets including bonds and the Yen which both rose with Asian and European stocks opening lower.
March Jobs data for the US came in at 215,000 new positions created beating market expectations of 205,000. Unemployment ticked up from 4.9% to 5% and average earnings increased by 0.3%. A mild but positive reaction in fixed income and FX markets suggests these numbers are being seen as a broadly positive indicator that the worlds largest economy is still on the road to recovery but remains consistent with the assumption that future interest rate rises in the US need to be approached with caution against the backdrop of lingering concerns around global growth.
Global equity markets were broadly back in risk on mode today as FED chair Janet Yellen gave an overly dovish speech yesterday stating that she had no intention to tighten monetary policy in the near future. She made it clear that due to continued weakness in global demand and a cloudy path for US inflation there was a call to tread carefully. Futures markets are predicting a zero chance that US borrowing rates will be raised at the next meeting in April with markets going on to price in just a 65.2 probability of a raise in November. The Dollar suffered on the back of the announcement with US and eurozone sovereign debt rallying on the news that the US has relaxed its outlook for further policy tightening.
In the FED’s latest meeting the US central bank has scaled back its forecasts for interest rate rises this year to just 2, down from the previously agreed 4 rate hikes. This announcement finally brought FED thinking in line with that of the markets. Whilst the FED remained very positive on the fundamentals of the US economy the main risks cited for this reduction were global headwinds adversely affecting the path of the US recovery. Markets were buoyed by the news that the FED would not look quite so out of sync with other central banks around the world with equity markets seeing a rally in risk assets, FX markets seeing the dollar give back some of its strength and Brent Crude heading back over $40 per barrel.
Mario Draghi today announced an expansion of the ECB’s monetary stimulus programme in a continued effort to boost inflation and stimulate growth in the Eurozone. This expansion will be along a number of dimensions: a cut to the ECB’s deposit rate by 10 basis points to minus 40 basis points, an increase in its quantitative easing asset purchase programme to 80bn euros a month which will also include investment-grade non-bank bonds and four more long-term borrowing long-term borrowing operations. The immediate response was a sharp weakening of the Euro, however this was quickly reversed due to the fact that Draghi was very cautious about the prospect of any further rate cuts, which the markets interpreted as an indication of a floor on rates.
US jobs continue to grow but wages falter - Fridays non-farm payroll numbers for the US came in at 242,000 above market predictions of 195,000. This figure continued to reassure investors that the recovery of the world’s largest economy remained on track. Having said that, wage inflation did fall short of expectations causing further concerns that many Americans are still not seeing the recovery feeding into their pay cheques. These 2 opposing figures will continue to weigh on the FED as they meet for this month’s monetary policy meeting with markets believing there is now an 8% probability of the US increasing its lending rate at this meeting.
Januarys non-farm payrolls number in the US was released today. The figure came in at 151,000 jobs created in January, this missed market forecasts of 190,000. Despite the figure falling short of estimates the unemployment figure which was set to remain at 5% dropped to 4.9% beating expectations. This positive figure came in along with an increase in hours worked and average earnings. Equity markets quietly gave back earlier gains and the dollar saw a rally back to strength as it paved the way for more speculation on further increases in the US base rate over 2016.
US PMI numbers in the Services sector showed a contraction from last month. The figure released at 53.5 was still comfortably above 50 but slowing from the previous months figure of 55.8 in December.
Manufacturing PMI is still in a depressed state closer to the 50 level but Investors hoped that buoyant PMI’s in the services sector would be enough to offset the slowdown in manufacturing. The disappointing data highlights concerns that the slowdown in manufacturing could be spreading to other sectors. The US Dollar weakened off the back of the news as investors dramatically pulled back their expectations of more rate rises in 2016 and with that a more accommodative economic climate for longer. Brent Crude rallied 7% overnight off the back of the weakening dollar Tomorrows Non-farm payrolls number for January in the US will give us more insight into the state of the world’s largest economy.
Mario Draghi has made it clear that he is unwilling to allow the markets to undermine him. Given that only six weeks have passed since the ECB announced an extension to its quantitative easing scheme, he did not feel that the volatility that we have seen at the start to the year has been enough to justify another round of additional monetary stimulus. As expected, Mr. Draghi announced that interest rates will remain at their current level of minus 0.3 per cent for the deposit rate and 0.05 per cent for the main refinancing rate. With this said, the announcement has led to speculation of the next round of stimulus occurring in May or June this year, with possibly another cut to the deposit rate or a further expansion of quantitative easing.
In his speech on Tuesday, Mark Carney, Governor of the Bank of England, announced a divergence from the path set by the Fed by deciding to leave UK interest rates unchanged. Mr Carney is remaining cautious due to the widespread downside risk that remains in the global economy and given that rates do not have much room to be cut further. The Bank of England is of the view that the UK economy is still too weak, with domestic concerns such as slowing economic growth, stagnant wage growth and a substantial current account deficit. Added to this, are concerns from abroad in the form of volatility in China and a continuing fall in the oil price. Soon after the announcement, Sterling fell to a seven-year low against the US Dollar, reflecting the unlikely prospect of a rate rise in the near future unless progress is made in terms of the pace of economic growth and getting inflation on track to its 2 per cent target.
Both Oil and European markets opened up this morning off the back of a positive session in Asia, resulting from China’s 2015 GDP figure coming in line with expectations at 6.9%. Given markets in 2016 have had one of the most volatile starts in recent memory this positive data provided investors with a welcome opportunity to put some risk back on the table as global markets speculate China’s economy will avoid a hard landing.
The price of WTI crude oil slipped to $29.67 per barrel and a new 12-year low. Oil stocks and currencies of oil producing nations predictably fell. As 2015 ended, and before the price of oil started falling again, it had been expected that the base effect of the original falls in Q3 2014, putting downward pressure on inflation in the developed world, would be falling out of the year-on-year by now. Barclays also lowered their inflation outlook for the UK as a result of the fall and pushed back their expectation of a Bank of England interest rate hike to the fourth quarter of 2016 and way further behind the Federal Reserve which is already hiking.
According to the Office for National Statistics who published their official figures yesterday, the UK manufacturing sector is in recession, with output 0.4 per cent lower in November than October and 1.2 per cent lower than the previous year. Among the largest contributors to this fall were pharmaceutical, machinery and equipment production, while motor vehicle manufacturing was the exception. The currency markets immediately reacted to this news with a weakening of the Sterling against the Dollar and the Euro. These figures indicate that the industrial sector will be unlikely to contribute to UK GDP growth picking up and have more than likely affected the 2015 fourth quarter growth rate figure, due to be released at the end of the month. On the bright side, Britain is not reliant on the industrial sector alone, which only accounts for 15 per cent of GDP, and the recent softening of the sterling along with very low oil and commodity prices will be likely to help manufacturers.
Employers added 292,000 workers in December, a figure substantially stronger than the 200,000 that analysts had expected, while the unemployment rate remained at 5% as expected. Notwithstanding the fact that the strong figure reinforces the Fed’s case for raising rates in the months ahead, there was a muted response from the equity market, however the US dollar strengthened to 1.455 against Sterling, its strongest level for several years. Overall, the report reinforces the durability in the US labour market and strengthens the Fed’s anticipated schedule for a rate rise this year.
Global equities began the year miserably, with the combination of a falling Chinese stock market, weakening Renminbi and the lowest oil price since 2004, contributing to a gloomy start to 2016. Volatility was mirrored in the US stock market, with the S&P 500 index suffering its worst start to a year since 2001. Spillovers from China and the US could have serious destabilising effects on the rest of the world, however, to panic this early on in the year would be premature, as much of the recent chaos has been a result of technicalities, including panic selling in China and careful tax planning in the US. Furthermore, a continuation of the better than expected performance in the eurozone helped by its low exposure to the energy sector, and strong employment and wage growth could prove very helpful at the global level.