Monday, March 16, 2015

Economic Summary for the week ended 16th March 2015

European markets continue to make headlines with the euro hitting fresh lows for this economic cycle and a proportion of Eurozone sovereign bond yields dropping to levels never seen before. The European Central Bank (ECB) started its QE programme last week and their €60 billion monthly purchase plan has increased demand for eligible bonds. This demand seems to be pushing much of the euro area investable bond universe towards negative interest rates. Around 30% of Eurozone sovereign bonds already have negative yields - a marked increase from just August of last year, as seen in this week’s chart. Because the ECB is relatively insensitive to valuation measures, negative yields could be here to stay, suggesting a continuation of a weakening currency and high stock market valuations..

Sunday, March 15, 2015

Economic Summary for the week ended 9th March 2015

The Reserve Bank of India managed to surprise markets once again with a rate cut of 25bps to key rates at an unscheduled meeting. This rate cut follows the recently unveiled Union Budget for 2015-16 and appears as a sign of support for the new policies set out by the government. In their latest statement the RBI appears confident of the government’s efforts for better fiscal consolidation, despite the delay in reaching the deficit target. An officially agreed inflation target of 4% (+/-2%) is also a positive sign of co-operation. The central bank and government’s efforts to work together with complementary fiscal and monetary policy should be a very constructive signal for investors in the Indian market.

Sunday, March 1, 2015

Economic Summary for the month ended 28 Feb 2015

2nd Feb 2015
Nearly all asset classes have had a volatile start to the year, none more so than commodities. This week’s chart looks at the price ratio of gold and oil which is at a 16-year high. A rising dollar and slower inflation should have seen these two commodities behaving in a similar fashion, however, correlations this year are negative. What is causing the spike? If you see the glass as half empty it could be fears of a repeat of 2008 when worries over the global economic outlook saw investors flock to safe havens such as gold. A more optimistic interpretation is that much of the slump in oil prices is a product of excess supply rather than falling demand which could boost growth in the near future.

9th Feb 2015
Since the financial crisis, “deleveraging” has been cited as a reason for sluggish economic performance. While US households, for example, have significantly reduced their debt burden, a new report by McKinsey & Co, shows that globally, debt has risen by $57tn since 2009. Furthermore, a significant proportion of the increase occurred in economies that were already heavily indebted. As a share of GDP, global debt has now risen to 286%, up from 270% in 2007. While this is certainly a concern, vastly increased and improved regulation of financial markets suggests the likelihood of another financial crisis in coming years is low. However, efforts to curve financial imbalances are still clearly on the to-do list of global policymakers.

23rd Feb 2015
The countdown has begun to the UK general election in May 2015. With only three months to go, the outcome is still far from certain with both the major parties level pegging in the polls. The uncertainty that hangs over the election is beginning to make itself felt in financial assets. This week’s chart shows the cost of hedging the pound has jumped considerably as implied volatility of GBP versus the US dollar over 3 months and 2 year time horizons has spiked to near four-year highs. Whilst predicting the final outcome of the general election and its impact on British financial assets is turning out to be quite challenging, investors should prepare for currency volatility in the months ahead.

28th Feb 2015
Last week, for the first time in history, Ireland’s 10 year bond yield fell below 1% - a stark contrast to the 14% borrowing cost seen in the midst of the European debt crisis. While Ireland’s debt-to-GDP ratio remains one of the highest in Europe (115%) and unemployment is in double digits (10%), GDP forecasts for the country name it the fastest growing nation on the continent in 2015. However, Ireland’s fragile economic recovery isn’t the only reason for this tightening. As the ECB kicks off €60bn of asset purchases this month, sovereign bond yields have fallen across the region in anticipation. Additionally, the Eurozone’s approval of Greece’s bailout extension last week squashed fears of an immediate Greek exit, causing a rally in periphery country government bonds and bolstering, if only slightly, investor confidence in the Eurozone as an entity.