The progress of global markets was checked in the second quarter, reports Chief Investment Officer Chris Ralph.
Two issues dominated global markets in the second quarter of 2015 – Greece’s future within the eurozone (or not) and the timing of the next rise in US interest rates. They generated recurring bouts of volatility and, in spite of a promising first quarter, US and UK markets ended June back where they started in January.
Concerns over the Middle East and Ukraine didn’t evaporate, but they were overshadowed in financial markets by the relentless saga of Greece, its debts, and whether or not it would remain in the eurozone, or indeed the European Union. There were serial negotiations between the Syriza government and the Troika (the European Union and the International Monetary Fund, advised by the European Central Bank) over what forms of austerity it should accept in return for more bailout funds.
Every time the creditors thought they were getting close to a compromise deal, the Greek government changed its tune, and talks eventually broke down. With no agreement, Greece was unable to make a €1.5 billion payment due at the end of June, and became the first developed country to default on an IMF loan. A few days earlier, Prime Minister Alexis Tsipras had announced a referendum on whether to accept the bailout package. ‘No,’ said 61% of Greeks who voted. Greek banks are rapidly running out of cash, however, and many now believe that Greece will leave the eurozone sooner rather than later. The president of the European Council has said this coming weekend is the final deadline for a deal.
European stock exchanges seesawed in response throughout the quarter, and bond markets have been just as volatile. Yields on Greek 10-year bonds are now over 18%. Yields on safe-haven 10-year German government bonds hit a record low of 0.085%, then quickly moved back to 1%. They have since fallen again. Even though eurozone growth has been picking up, with low but positive inflation, the FTSE Europe ex UK Index was down 5.6% on the quarter in sterling terms.
While US markets kept a weather eye on the Greek drama, they were just as preoccupied with their domestic economy or, more specifically, when it would be strong enough for the Fed’s first interest rate rise in a decade. A contraction in first-quarter GDP growth came to be seen as a one-off, linked to bad weather and port closures. Macroeconomic data was mixed from April to June, though retail sales and consumer confidence improved noticeably towards the end of the quarter. Employment continues to grow and the consensus view is for a rate rise towards the end of the year.
The S&P 500 index reached a new high in mid-May, though only by a small margin. This was the ‘reluctant rally’, as investors looked at near record-low bond yields and turned to shares as the least-worst option. US mergers and acquisitions activity in the first six months was the strongest since records began in 1980. Energy, industrials and utilities stocks fell along with oil prices and Chinese growth hopes, and the S&P 500 ended the quarter down by 5.5% in sterling terms.
Chinese growth may have slowed but its stock markets boomed. They hit a seven-year high in mid-June, having risen more than 150% in the past year. But as macroeconomic data worsened, the Shanghai Stock Exchange Composite Index fell by 30% over the ensuing three weeks, in spite of a number of government moves to stem the falls. Hong Kong equities rose strongly, benefiting from the market’s new ability to trade certain mainland China stocks. Markets in the Philippines and Malaysia underperformed, and the MSCI All Country Asia ex Japan Index fell 5.0% in sterling terms over the quarter. Japan’s TOPIX equity index, supported by a healthy corporate results season, rose 5.8% in yen terms. However, a weakening yen saw gains wiped out by the impact of currency translation for UK investors.
The UK equity market underwhelmed, and in June the FTSE 100 Index had its worst month for three years, losing 6.6%. The poor performance was driven in part by lower commodity prices and a strong pound, which affected important index constituents in the mining, energy and healthcare sectors. While the FTSE 100 lost 2.8% over the quarter, the more representative FTSE All-Share Index lost 1.6% over the quarter, partly reflecting uncertainties over Greece. Mid-cap companies outperformed, with the FTSE 250 up 3.6% over the same period.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.
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