We continue to live in unchartered waters, as central bankers constantly seem to be looking for ways to stimulate the global economy, keen to prove they have not run out of bullets. Negative interest rates, which were been cheered a few weeks ago are now being feared, partly as their use reflects a lack of economic growth, and partly as it may have unintended consequences for banks. Banks shares were hard hit this week, in the main on these new fears, but also as earnings from Societe General and Swiss Bank failed to meet analyst expectations, along with capital concerns early in the week at Deutsche Bank. Jamie Dimon helped reassure investors in the sector as he invested $26m in JP Morgan stock, after the fall. Dividends are getting cut; in the past week Rio cut its dividend, as did Rolls Royce. Investors appear to be selectively rewarding these announcements as the share prices rise, this may tempt more CEO’s to make similar moves. The world is full of many conundrums but to highlight another, the strong US employment data is not historically associated with relatively weak economic data, and disappointing earnings as appears to be the case at present.
Increased geopolitical risk may also be playing a part in the extra volatility we are seeing in capital markets, as well as fears for the upcoming Brexit referendum. Yields in ten-year treasuries fell to 1.5% at one point during the week post Janet Yellen’s testimony, leading to sharp falls in equities. Some of these moves were reversed on Friday in both bond and equity markets. Worries were reignited over the eurozone economy as 10 year German bond yields fell to 26bp, and yields rose on some of the peripheral countries debt. Gold has been recovering in the past weeks, on increased capital market fears. Gold, we believe, is also a reflection on real bond yields and if the returns on bonds fall the lure of gold increases. The strong end however this did not prevent equities falling for another week. Once again the Vix index did not appear to reflect the greater volatility closing at 25, still far from the low 40’s back in August.
Looking to the week ahead, the release on Wednesday of the minutes from the last Federal Reserve meeting will be eagerly awaited. On Friday, the latest US inflation data, expectations are for the rate to fall to 0.7% year on year. Earnings will continue to come through, Wal-Mart report this week; investors may look to this report for a further indication of the strength of the consumer.
We also get the latest UK inflation data on Tuesday; the year on year rate is expected to come in at 0.2%, and on Wednesday the latest employment rate and on Friday January retail sales data.
Asian markets overnight on Sunday mostly followed the lead from developed markets on Friday. This was despite weaker than expected import export data for the China region, as sentiment was helped by the continued rally in the Yuan against the US dollar.