Last week was a poor week for risk assets and one that ended with more uncertainties than it started. The unexplained circumstances as to what happened to the missing Malaysian flight, adding to the general tensions in the world. The situation in the Ukraine continues to escalate. Sunday’s Crimean vote result could raise tensions further; on the other hand this vote may be the catalyst for global leaders to look at the wider impacts of their actions and work harder to resolve the situation.
In some ways considering the general news flow, equity markets performance could have been a lot worse. The FTSE 100 fell 2.75%, for its worst week since June last year, getting close once again to the bottom end of its trading range. The S&P 500 fared slightly better down 1.7% on the week, erasing all the gains of the year. Retail sales and employment data from the US came in better than expected, but these pieces of good news were overshadowed by the other global developments. Bond markets rallied in the US and UK as one would have expected in the current "risk off" climate; US treasuries and UK gilts currently yield close to 2.65% for the 10-year maturities. Surprisingly, US treasury yields are still marginally higher than they were at the start of the month, this may be as a result of the improving US economic data. The Vix rose sharply last week, closing at 18 points, up 30% on the week.
Concerns over both the Chinese and Russian government’s financial position grew over the week. Worries about China’s debt levels came after further disappointing economic data and the recent corporate bond default. Worries for Russia came as its finances are threatened by possible actions of the West. As of Friday, Russian 10-year government bonds yield 10%, having started the year around 7.5%. Some commentators predicting current events will lead to another Russian bond default, recreating a Lehman style event. Yields rose to nearly 50% the last time it defaulted on its debt in August 1998. On that occasion the FTSE 100 fell approximately 20% in just over a month, but it did manage to regain those losses by the end of the year.
China again added to the general woes as its economic reports continue to disappoint. I stick to the view that the Chinese Government have enough tools to stimulate the Chinese economy if needs be, but are also keen to ward of excessive risk taking and are acting to curb such attitude. It is a difficult balance to maintain. A lot has been made also of the weakness in commodity prices as another sign of weakness in the global economy, with the copper price falling 10% on the week. The plus for those companies that buy in raw materials at least will see costs falling.
Next week’s events of note will obviously be the budget on Wednesday. In the US, Janet Yellen will Chair her first Federal Open Market Committee meeting. Interest rates will be left where they are, the more interesting debate will be if in the face of the current uncertainties the Fed decide to suspend the proposed $10bn reduction in the bond purchase program. Monday’s Industrial Production report and Tuesday’s inflation data may influence that decision. In Europe, Monday will see the final February year on year inflation report. Any downward revision will mean more pressure on the ECB to find a means to start their own version of QE.