Global Market Roundup from The Wealth Advisory (Marbella)
Economics - Why all the fuss about QE?
The world’s major central banks have made it clear that rates will be kept low for as long as it takes to ensure economic recovery, even if quantitative easing (QE, or asset purchases) programmes are gradually withdrawn.
US Federal Reserve (Fed) Chairman Ben Bernanke pulled back further from an early move to taper QE – noting in testimony to Congress that any scaling back will “depend on economic and financial developments” and is not “on a preset course". US data released during the past week was generally solid, but not enough to signal the beginning of the end of US QE.
Meanwhile, new Bank of England Governor Mark Carney has quickly replaced further QE measures with a proposal for "forward guidance" that low rates will be maintained until recovery is on a firmer footing. This coincides with an improvement in UK consumer spending and an uptick in inflation.
Equities - Positive expectations to support shares
Some 40% of US companies have now reported results this quarter with 89 beating expectations and 48, including Google and Microsoft, missing their targets. Year-on-year growth in sales and net income was 4% and 11%, respectively. Earnings so far suggest a continuation of the slowdown in sales, caused by declines in the financials, staples and discretionary sectors. However, margins have remained resilient at 10%. This suggests companies are continuing to improve efficiency, with little wage inflation and moderate input cost rises ¬– raw industrials have fallen nearly 5% year-to-date. Domestic companies are being favoured over exporters amid weaker global demand and a stronger dollar.
We continue to believe that earnings will beat expectations, as forecasts were driven by overblown fears that the Fed would begin to taper QE. As such fears recede, this will keep equities supported. However, we continue to find better opportunities outside the US, in our preferred markets of Japan, Europe and the UK.
Bonds - Fed reaction lifts Treasuries
US Treasuries rallied after the Fed Chairman reinforced an accommodative policy stance, insisting that the jobs market is still far from satisfactory. Weak housing data supported the rally, with housing starts and building permits down 9.9% and 7.5%, respectively, in June. But gains were tempered by a reduction in first-time jobless claims and a very strong Philadelphia Fed Business Outlook index (19.8 vs. 8.0 expected and 12.5 last month).
We expect volatility to remain elevated as the market awaits further clarification of the strength of the US recovery. We maintain our long-term view that Treasury yields will continue to rise (prices fall) amid an improving recovery. Our preference remains to use short-term rallies in Treasuries to shift from government bonds to debt with a lower duration (a measure of sensitivity to changes in interest rates), such as high-yield bonds.
Currencies - A sterling holiday for European tourists
Europeans heading to Britain for their holiday will get a better deal on fish ‘n chips this summer, while British holidaymakers going to the Continent will have to shell out more pounds for their poolside drinks than they did a year ago. But at least they can, perhaps, feel more secure that the eurozone won’t break up while they are there.
The euro has strengthened some 10% against sterling over the past year, as the worst of the eurozone debt crisis seems to have passed. Growth is sub-par in both Britain and the eurozone, and needs additional monetary stimulus (with no fiscal stimulus on the menu on either side of the Channel). We expect the euro to trade in a narrow range around its current levels against the euro. So go ahead and enjoy your holiday – we don’t see prices getting any better next year.
Reproduced from an article that appeared in Coutts.com
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