Markets never fail to do the unexpected, in mid January if you had told fund managers that the FTSE 100 would be teetering just below 7000, and that the Russian Stock market would be the best performing market so far in 2015, both statements would have been met with a fair degree of skepticism. Why would you buy UK equities at the start of the year? Firstly the index is heavily exposed in the resource sector, commodity prices at the time seemed to have no floor, on top of that the uncertain outcome to the general election. The Russian stock market is up just under 20% this year so far, again heavily resourced based and with many political uncertainties. This once again only goes to prove that how important sentiment is, and how the greatest opportunities lie where the most fear exists.
On Tuesday Janet Yellen testified before congress after presenting her semi annual monetary report. The Federal Reserve will not hike rates for the next few Open Market Committee meetings, Janet Yellen stated in her opening remarks. Market commentators took this to mean the earliest June, and possibly not until September. Equity and bond markets reaction was muted to the statement. Treasury yields fell for choice, the ten-year yield falling back below 2%, and the 2-year bond yield falling back to 60bp from 67bp a few days earlier.
Greek stocks and bonds had a good day on Tuesday as the main Greek index rose almost 10%, and bond yields fell. The source of the relief rally was the confirmation of a four-month extension to its bailout. The euro rose modestly on the news. What four months will do is anyone’s guess, the global economy may look a little brighter, but Greece’s unsustainable debt burden is unlikely to. After the dust settles, some investors may take the view that today’s announcement gives four more months for a plan to be drawn up how to safely negotiate a Greek exit. We have always argued in this blog that whilst the will of the Greek people is for Greece to remain with in the euro, politicians in Greece are duty bound to find a solution. If that position changes over the coming months, the likelihood will be that the Syriza party’s view will as well.
Equity markets almost from the start of the recovery in 2007, but maybe more noticeably recently, have followed a similar pattern. A gentle grind higher followed by a sharp correction then a grind to new highs. On average a correction comes after 3 months grind. As global indexes break through previous barriers that could put the next notable correction slightly ahead of the first US rate hike.