Market Bulletin - Easter break?
After a shortened week, investors digest concerns over this week’s Greek debt deadline and weaker-than-expected US employment figures.
Investors headed off for Easter after a shortened week in which Greece was back in the news and mixed US data maintained speculation about when the Federal Reserve might raise interest rates. With markets on both sides of the Atlantic closed, the release of disappointing jobs data on Good Friday added to evidence that the US economy has lost momentum since the start of the year. Non-farm payrolls rose by 126,000 last month, compared with forecasts of 245,000, ending a 12-month run of gains above 200,000. The number of jobs created in January and February was also revised down by 69,000. However, the unemployment rate held at 5.5%, a six-and-a-half-year low.
A slowdown in the pace of employment growth might delay the Federal Reserve’s first interest rate hike until September, particularly when added to the signs of slower GDP growth in the first quarter. Interest rate futures certainly suggest that the market is increasingly of the view that the Fed will hold off from raising rates at its June meeting. The S&P 500 Index rallied at the end of the week to register a gain of 0.35% over the four-day period.
Meanwhile, signs of rising confidence in boardrooms and the need for companies to generate growth came in figures released by Thomson Reuters which showed that global merger and acquisition activity is up 21% in the first three months of the year, compared to a year ago. American companies are leading the way in driving the pick-up, with the healthcare and pharmaceutical sector a particular area of activity.
End game (again)?
On Wednesday, Greece submitted its latest list of proposed reforms to eurozone authorities, which remain key to unlocking further bailout funding. Athens hopes to raise €6.1 billion in 2015 by clamping down on VAT fraud, and oil, alcohol and tobacco smuggling, as well as introducing new levies on luxury goods. However, dissatisfied eurozone officials warned the government would still need to cut pensions and wages to receive the €7.2 billion it needs to stay afloat. Greece’s current public sector wage and pensions bill amounts to €1.2 billion per month, and the next payment of salaries is due on 14 April.
Before then, on Thursday of this week, a loan of €450 million from the International Monetary Fund is due for repayment. No developed country has ever defaulted to the IMF; but a senior official of the ruling Syriza party said that the choice between doing so or defaulting to the country’s own people was a “no-brainer”. Over the weekend, though, Yanis Varoufakis, the Greek finance minister, met with the IMF’s managing director Christine Lagarde in Washington and confirmed that his country had the cash to repay the IMF and intended to meet “all obligations to all its creditors, ad infinitum”.
For how long the brinkmanship can continue remains to be seen, but it is clear both sides are playing a risky game. That said, investors still appear confident that a resolution of sorts will be found; two-thirds of respondents to a recent survey by sentix don’t think there will be a break-up of the currency union within the next year, compared to results from a survey in July 2012, when Grexit fears last peaked, at which point 73% thought a country might leave the euro within 12 months.
Elsewhere in the eurozone came encouraging news that unemployment had hit its lowest level for nearly three years and that rates of deflation had eased, furthering signs of a springtime economic rebound. At 6.4% in March, Germany’s jobless rate was its lowest figure since the country was reunified in 1990 after the fall of the Berlin Wall. However, the region’s second- and third-largest economies, France and Italy, were amongst six nations showing an annual increase in unemployment, up to 10.6% and 12.7% respectively.
Figures from Eurostat, the statistics bureau of the EU, confirmed that inflation in the single currency area hit -0.1% in March, up from -0.3% the previous month; with the change attributed largely to a levelling off of falling fuel prices rather than to the start of the ECB’s quantitative easing programme. Indeed, in Germany price growth climbed into positive territory in the year to March, rising to 0.1%; and a jump of 3.6% in German retail sales in February also highlighted how consumption in Europe’s largest economy is propping up the euro area’s recovery.
The FTSEurofirst 300 Index slipped 0.2% on Thursday in a quiet session ahead of the extended weekend, but registered a gain of 0.6% over the four-day week. Expectations of improving eurozone growth, as well as the impact of the ECB’s asset-buying programme, have spurred European stocks to strongly outperform in the first quarter of the year. The week also marked the end of a quarter in which the euro currency recorded its biggest quarterly drop since its creation in 1999.
After the previous week’s losses, the blue-chip FTSE 100 Index recovered ground, boosted by rallies from mining and banking stocks, to register a small rise of 0.35% over the shortened week. In doing so, the index registered its biggest quarterly gain since 2013. Mining stocks benefited from encouraging signs from the Chinese authorities that they would stimulate the world’s second-biggest economy with spending on infrastructure. However, the standout performance came at the end of the week from Marks & Spencer, which saw a 4.4% jump after reporting its best non-food sales performance in almost four years.
Revised figures from the Office for National Statistics confirmed that the UK economy grew at a faster pace in 2014 than originally estimated. The revised annual growth rate of 2.8% marks the highest pace of growth since 2006, when the economy grew by 3%, and puts the UK further ahead of other G7 countries than previously thought. The ONS said that exports provided the biggest contribution to the revised figure, although household spending also helped to drive the increase.
As commentators assessed the likely (lack of) impact on the general election result of the political party leaders’ televised debate, attention also focused on what effect previous elections have had on share prices. Figures for the six campaigns since 1984 (when the FTSE 100 Index was launched) reveal that market volatility in the period before polling day has actually been lower than it is normally. The UK equity market fell more significantly during the 1992 and 2010 campaign periods – elections when the result was particularly uncertain – suggesting that electoral uncertainty is bad for shares. On both occasions the FTSE 100 Index fell by more than the S&P 500, so the falls weren’t entirely due to global factors.
In fact history shows that, in four of the past five elections, UK equities have been more volatile in the three-month window after the poll than in the three months before, with the period after the 2001 election seeing the biggest move in share prices when stocks fell by 13.3%. As always, and especially given the uncertainty over the result of the forthcoming election, the message for investors is to avoid attempting to second-guess the short-term fluctuations in stock markets.
Act in haste…
This week sees the long-awaited introduction of new pension freedoms, designed to provide individuals with greater flexibility over how and when they can access their retirement fund. It is estimated that savers over 55 are now free to withdraw £350 billion from their pensions. Amongst the many challenges and opportunities the new rules present to retirees, the most common questions seem to be over the level of income that could be expected from savings and how long they would last. But there are any number of issues to consider in deciding the right course of action, not least of all the tax consequences of different income options.
“These are decisions that can make or break your lifestyle aspirations for retirement, a period that could last 30 years or more,” said Ian Price, divisional director at St. James’s Place. “It is critical that individuals don’t rush into action, but take the time to seek advice to fully understand what the new freedoms mean for them.”
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