With the announcement of more mega-mergers, taking the total to over $800bn from the start of the year, Monday saw a strong rebound in US equities coinciding with a recovery in the dollar. This solid start to the week in the US however did not follow through in Europe as equities took a knock on Tuesday. Later in the day US equities gave up a lot of the previous days gains.
The FTSE 100 fell around a percent and a half, whether this reversal can be prescribed to the sudden focus on the election, or the comments from Mark Carney speaking in Germany that he is strongly of the view that the next move in UK rates will be up. Somewhat in contrast to the comments a week or so ago from the Bank of England's chief economist suggesting that in his view the next move in rates was as likely to be down as up. The FTSE 100 having broken the 7000 barrier earlier in March, after so many months of trying, seems unable so far to hold on to that lofty level. Better than expected consumer data and a revision higher to the final Q4 GDP number for 2014 along with Mark Carney's comments may have also brought forward rate hike expectations. The morning paper headlines were full of the expectation that the FTSE 100 was due to have its best first quarter of the year for 2 years; Tuesday's move may have put pay to that.
European equities also took a hit as Greek ministers head home without reaching an agreement with European leaders. If history is anything to go by and Greece can survive until mid April to find a solution then an agreement will once again go to the wire before the inevitable compromise.
Quantitative easing may be storing up trouble for later but it cannot be denied that it does not have an impact generally for the better at least in the short term. Stocks in Europe have rallied this year, although investors outside of the euro will have lost some of those gains to the currency, inflation fears have stabilised and economic sentiment in the euro zone rose in March to a four year high. Quantitative easing is a concept many seasoned investors probably have trouble getting their heads around, and this maybe why so many don't trust it. Quantitative easing in our opinion is about changing sentiment as much as the physical act of adding liquidity to the economy. The Federal Reserve has now completed its QE program and is now looking for its first rate hike, with the belief that the US economy will now recover under its own steam, Tuesday’s far weaker than expected Purchasing Managers manufacturing survey for Chicago will not help that belief.