THE SHERWOOD OVERNIGHT UPDATE REPORT 20th September 2015 European markets rally to fresh 7-year highs amid increased QE speculation. Summary • It was a mixed trading session on global financial markets with the European market rising to a 7-year high in response to increased QE speculation, the Chinese market recording its largest trading day loss since 2008 and US markets were closed for Martin Luther King holiday. There wasnt much fresh macro news out last night, so investors speculated that the ECB will deliver on their expectations of QE with nearly all regional bourses rallying as a result. Meanwhile, Chinese shares were swamped by a change in trading rules for margin lenders for several large market participants, which sparked the largest market sell-off in six years although it was hard to see how this would impact market-wide earnings to such a degree, with the impact largely on sentiment. By the closing bell in Europe, the MSCI World Index was higher (+0.2%) with an advance in Europe (+0.8%) offset by a decline in Asia (-0.5%). • In other financial markets, 10-year government bond yields were little changed (US Treasuries steady at 1.83%, UK gilts down by one basis point to 1.53% and Japanese bonds closed at 0.21% which is a fresh all-time low), high beta currencies were mixed against the US dollar (AUD -0.2% to 82.0 and the Euro +0.4% to 116.0) and US commodity markets were closed for national holidays. • The SPI suggests that the Australian market will open -5 points lower (-0.1%) at 10am AEST. Market news • Asia - Asian markets closed lower to begin the new week, but most individual markets rallied on the day with their advance swamped by losses in Hong Kong and Chinese markets where a ban of new margin loan products by market regulators hit market sentiment. Accordingly, 10 of the 11 listed brokerage firms suffered double digit losses and there was also some cautious discussion around the property sector after data confirmed that the downward pressure on new home prices persisted in December. The down draft from the Chinese sell off pulled other markets of their daily highs, with a weaker yen having a less supportive impact on Japanese shares, whereas higher commodity prices helped to lift the Australian market. Elsewhere, a rise in government investment in the tourism market boosted travel-related shares in Korea. By the regional close in Mumbai, the MSCI Asia Index was lower (-0.5%) with advances in Taiwan (+1.0%), Korea (+0.8%), India (+0.7%), Japan (+0.7%), Australia (+0.2%) and Singapore (+0.2%), offset by losses in Hong Kong (-1.3%) and China (-6.6%). In the local market the S&P/ASX 300 Index was +10 points higher (+0.2% to 5,250) although this was well off the daily peak of +62 point, with five sectors closing higher led by materials (+1.3%), energy (+1.1%) and healthcare (+0.5%), whereas utilities (-0.3%), consumer staples (-0.7%) and telcos (-0.7%) were among the largest decliners. • Europe - European stocks closed broadly higher as investors decided that they would be optimistic about the ECB announcement on 22nd January regarding a regional sovereign bond QE program although their was considerable debate about the size and structure with €500 billion the market expectation for the day. This sent nearly all regional bourses into positive territory, where it stayed all session long given the absence of macro updates. However, there were also some concerns about whether the plan will be watered down to placate the Germans or could be delayed the see the impact of the Greek elections on the 25th January. Meanwhile, the Central Bank of Denmark became the latest of a growing list of central banks to lower interest rates, this time cutting the deposit rate by 15 basis points to -0.2%. By the regional close, the EuroStoxx Index was higher (+0.8%) with gains in industrials (+0.7%) and banks (+0.7%) offset by losses in energy (-0.4%) and materials (-1.4%). Among the major markets, gains were dominated by Germany (+0.7%), with the UK (+0.6%) and France (+0.4%) also higher. In the periphery markets performance was also upbeat with solid gains in Portugal (+0.8%), Ireland (+0.9%), Italy (+1.2%) Spain (+1.2%) and Greece (+2.8%). • US - on Wall Street US markets were closed for the Martin Luther King holidays. Yesterdays major economic news • Australia/Asia - no domestic releases. • Europe - no major releases. • US - no major releases. Todays major data releases Australia/Asia • Economics - no major releases, but there is December quarter China GDP (Sep: +1.9% q/q), December China fixed asset investment (Nov: +15.8% y/y), December China industrial production (Nov: +7.2% y/y), December China retail sales (Nov: +11.7% y/y). • Equities - no major releases. Europe/US • Europe - January ZEW survey (Dec: +10). • US - January NAHB housing market index (Dec: 57). What is the key investment message overnight? If there has been one thing evident already in the New Year it is that markets are going to be increasingly volatile this year and that surprises can literally come from anywhere. One day the Swiss National Bank says their currency cap is the cornerstone of their policy and 24 hours later they abandon it and the market declines -15% in two days. China declined -8% yesterday due to a regulatory change in its small margin lending sector. This is all part of investing in a global sharemarket which has rallied strongly on excess liquidity supplied by central banks, and living in a global economy with secular stagnation, where government yields are at historic lows in nearly all G15 advanced economies, and well below levels recorded during the Great Depression and WW2 (where banks were encouraged to hold government debt). Record low yields mathematically makes sharemarkets more sensitive to changes in government rates and as secular stagnation reflects demographics changes, it is almost certain that low yields are here to stay. 2015 is likely to be a year of low returns in all asset classes and increased volatility. However, there is likely to be a wide range of investment performances and the key will be determining which assets have sustainable cash flows as investors are likely to punish underperformers, and which have excessive valuations. This is no different to other market times, other than the price of being wrong will be increasingly amplified and hard to make up. Regards, Matt Sherwood Head of Investment Markets Research
Posted on: Mon, 19 Jan 2015 23:05:59 +0000
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