This week may have looked like it passed relatively uneventfully after the Easter holiday; however there are some events that could have longer term repercussions for financial markets that are worth watching:
- Switzerland: it sold 10-year debt with a negative yield. Yes, that means that investors bought nearly CHF 250mn of Swiss debt and paid the Swiss government for the privilege. Some may think that this represents the crackers mentality of the market right now; others would say it signals that global monetary policy makers are the crackers ones. Since Swiss rates are now at -0.75% (there are rumours that rates could be cut even deeper into negative territory), it is not surprising that yields are so low. Short-term rates in Europe have fallen into negative territory already, and we could see negative yields even further out the curve if the ECB’s QE programme doesn’t boost price pressures.
The long-term ramifications of ultra-low yields include: excessive spending by governments leading to unsustainable debt loads and low investor returns on “safe” assets like European government debt, leading to more investment in high risk assets, possibly sowing the seeds of the next crisis.
- Don’t bank on a rate hike from the Fed this summer: the Fed minutes released on Wednesday showed a more balanced approach from the Fed, even though they have dropped the term “patient” in regard to future rate hikes. Thus, the prospect of a June rate hike is unlikely after last month’s disappointing payrolls report. Although we think that the Fed is likely to hike rates this year, before other G10 central banks, there is still a degree of uncertainty in the markets. This is reflected in the FX market. The dollar index is still below the high reached on 13/03 at 100.40, and after initially rallying on the back of Wednesday’s minutes, it has since given back gains as Treasury yields fall.
The ramifications of the Fed remaining on hold: the dollar rally could be less clear cut than we anticipated at the start of the year.
- Oil: Crude oil inventories in the US rose to a record last week, and Saudi Arabia has also ramped up production. If you were looking for the world’s oil glut to recede any time soon and boost oil prices, you may need to re-think your position. Analysts suggest that Saudi could be boosting production to maintain market share if US/ EU sanctions on Iranian oil exports are lifted, as it would not want to lose out to its bitter rival. If this is the case, then don’t expect Opec production to slow down any time soon.
The ramifications from a low oil price: this could make it harder for central banks like the SNB and ECB to win battles against deflation and could see them maintain loose monetary policies for a prolonged period, further distorting markets (see above). It is also likely to keep the oil price within a tight range for the foreseeable future, limiting the upside.
- Greece: Athens caved and gave the go-ahead to pay the IMF EUR 450mn narrowly avoiding a default, although today is supposedly the day that Greece runs out of money. The ECB has raised its emergency funding levels for Greek banks once again, now Greece has until 24th April to present a revised economic reform plan to Eurozone finance ministers to secure a long-term solution to its bailout fund, which expires in June.
The ramifications of Greek issues: we deem the prospect of a Grexit to be fairly low down the list of things to worry about, and even Greek bond yields have fallen on Thursday. However, the prospect of a Eurozone member leaving the bloc could still weigh on financial market sentiment and could trigger market nervousness in the coming months.
- UK election jitters: with less than a month to go, the market is starting to worry about the UK election on 7th May. Fears include a hung parliament and the prospect of a referendum on the UK’s EU membership if the Conservatives get into power. While the FTSE 100 is shrugging off these fears, it was only 80 pips away from its all-time high on Thursday; sterling is taking the brunt of market uncertainty, as you can see in figure 1 below.
The ramifications of the UK election: this is not easy to answer as we won’t know until we get the results late on May 7th. However, sterling is likely to struggle; as the UK’s public finances are also in a mess. The UK’s current account deficit stands at a whopping 5.47% of GDP, which is worse than its other G10 peers. A whopper of a current account deficit combined with a hung parliament could prove to be sterling’s second Lehman’s moment.