Tag Archives: Federal Reserve

This was the first semester… and these are some clues for the second

These are tough times for investors. We have already commented some of the weird phenomena that we are living in the markets, but the first semester was not easy at all to find good performances. Instability comes from several fronts:

  • EU: the ECB has no clue to solve the current troubles to make money and credit flow. Interest rates are negative, Euribor is also negative and the debt gives no return for investors. In the current unstable and volatile situation, investors prefer to pay instead of becoming profits from Treasury Bonds, specifically German ones. Finally, the black swan appeared: Brexit is there to stay.

Europe global trends in the first semester

  • USA: the Fed shows doubtful and indecisive. Markets have become mad and Mrs. Yellen prefers to delay the more-than-once announced (in Fed gobbledygook) rate hike. The presidential election also opens a new possible black swan, because a victory of Trump could cause another turmoil in the exchanges. The poverty of returns in the US markets is very clear with a figure: S&P 500 has produced positive returns YTD since Easter and its peak was under 4%.

USA global trends first semester

  • Asia: China sets the pace in the continent, but there are hard signs that the economy doesn’t grow as before. Exchanges reflect this low confidence and Shanghai performed erratic since the crash last August. The performance fluctuation band was between -15% and -25% YTD. Japan is also deadlock, because no policy obtains a positive outcome to get over the long economic stagnation of the country. This continent is the weakest for investors.

Asia global trends in the first semester

  • Latam: Although Brazil has experienced a great political crisis, investors acted more confident and the performance moves between 10% – 20% YTD. Mexico also shows a stable evolution in the markets, as the oil price has begun to rise.

Latam global trends in the first semester

This is the past and current situation, but where are the opportunities for the second half of the year? We do not publish forecast, but we can speak about trends.

Some days ago, BlackRock, the main ETF manager, decided to downgrade equities, because “stocks still face several obstacles”. Bank of America published a survey in which investors declared to bet higher for cash, peaking the highest allocation since 2001 in investment portfolios. Gold soared a 25% since January and volatility index VIX rallied this last month after a quiet quarter.

Times are hard to take investment decisions. The best one is no panic. Current volatility has to do with it and decisions under this pressure are usually wrong. Investors play for the long term. These are times to keep calm, avoid sudden changes and smart rebalance your portfolio.

Q1 confirms that instability is the rule in the markets

The closing of the Q1 in the markets confirms that this will be a complicated year for equities. The Great Crisis that the world lived since 2007-2008 is not ended at all, as there are some points of instability. Some of them are related to international politics: the shadow of terrorism, the wars in Middle East, the fight in the European Union and the US elections are some points to watch that affect the market evolution. However, there are also financial and economic troubles to solve: the ECB policies show that they are not enough to stabilise the European credit flows and return to some inflation, while the Federal Reserve stays cautious in the next steps to follow in its monetary policy. No one wants to be blamed of being a cause of a second big recession.

The T-Advisor charts show these statements. As we can see in the both charts below, comparing the general trend in global regions, there has been a positive evolution between the beginning of the year (above) and the end of the Q1 (below), but very slight apart from the Latam region:

T-Advisor global trends in January, 1st, 2016

T-Advisor global trends on April, 1st, 2016

If we check the evolution in each region, we can perceive much better the specific changes:

EUROPE

European stock exchanges evolution in Q1 2016

Besides the traditional parallel evolution amongst the European markets, it is also to underline that no main stock exchange registered positive returns YTD. The recovery from February was stopped by the instability created by the possibility of a Brexit (an independence of UK from the EU) and the terrorist attacks in Brussels, in the heart of the capital city of the European institutions. The ECB has also lots of troubles to make efficient their decisions, because its expansive policy has still no positive effects in the real economy to consolidate the general recovery.

AMERICAS

American stock exchanges evolution in Q1 2016

The trend is positive since the second half of January, but S&P Index was finally positive YTD in the last weeks of the Q1. The uncertainties related to the US election (no candidate is clearly heading the primary elections) and economic evolution make investors cautious. However, the announcement of the Fed about a delay in the next rate hikes was welcomed and consolidated the slight bullish trend.

The market behaviour was better in the emerging countries, although some evolutions are very linked to national decisions. For instance, the evolution of Argentinian Merval in March was erratic because of the agreement with the creditor funds, which was not totally assessed as positive by investors. In the case of Brazil, the cases of corruption in the Government have determined the ups and downs in Bovespa.

ASIA

Asian stock exchanges evolution in Q1 2016

The biggest markets (Shanghai and Tokyo) are really bearish and sum a very negative YTD return in this Q1. In China, the bubble broken last summer produced a hard landing in which the market is still moving. The trend is erratic or, better said, there is no trend. In Japan, there are worries about the global evolution, because the country has a great support from its exports. The doubts about the economy, underlined by the low oil price, and the instability of the exchange rate with the dollar are two hard reasons to be wary.

What can we expect in the Q2? We do not like to make any prediction or copy what others expect, but we prefer to alert about some relevant issues:

  • Look at the oil price: it is linked with the global activity.
  • Follow the Fed and ECB decisions: the Fed is progressively hawkish and the ECB should be more dovish to push the credit flow and inflation in the Eurozone.
  • Watch the Q1 profits of the companies, because they provide a guide about the economic activity.
  • Be wary about emerging markets: the dollar evolution (if the Fed hike the rates) can be negative for them.

USA: economic uncertainties in an election year

The American economy has shown how an open economy can perform the best and the worst. In the years of the beginning of the crisis, there was a huge drop in all indicators. The GDP fell an 8% in a quarter in 2009, but at the end of the same year, it grew around 4%. However, the evolution shows a great instability and the forecast are also similar, with a perspective of 2-3% GDP growth for this and next year.

US GDP evolution in the last years

The past market turmoil was also dangerous for investors. Under these circumstances, the Federal Reserve chose a wait-and-see strategy. Finally, in its last meeting, the institution pointed out two rate hikes instead of four, as it mentioned in December. Investments and exports remain soft and a rate hike could make dollar more expensive, which would not be positive for future developments.

These uncertainties happen in a presidential election year. Caucuses and primary elections show the following stage: Democrats fight is between the moderate Hillary Clinton and the liberal (in an American meaning, which in Europe would be social-democrat) Sanders; on the other side, Republicans are divided between the millionaire Donald Trump and the senator Ted Cruz. Clinton and Trump, respectively, have the advantage. The difference is that the Republican Party does not support Trump. Let’s see the evolution of this situation, even more when The Economist listed a possible Trump victory as one of the 10 main global risks.

What is happening in the American markets? If we take into account the S&P 500 as one of the main references, there was a steady grow till last year, when market uncertainties were back with the Chinese crisis and how it could affect US, apart from the drop of the oil price.

T-Advisor chart: S&P 500 evolution in the last 5 years

T-Advisor global trend evolution also shows this weakness in the last year:

T-Advisor chart: USA global trend evolution

The investing landscape is not clear, but several experts are optimistic about a positive evolution of S&P this year, with a closing better than in the beginning of the year. For instance, Oppenheimer is the most optimistic and bets that the reference index will close 2016 around 2,300 points.

In the case of the Dow Jones, these are the companies with the best performance in the last year:

Best performance assets in Dow Jones

On the contrary, these are the worst:

Worst performance assets in Dow Jones

It is notorious how technology is not a sure bet, as Microsoft is on the top, but IBM is amongst the worst-performance companies, just to mention two very well-known brands.

To sum up, politics will influence this year in America, but the economic machine works very independent from them. The Fed actions, the evolution of the oil price and the dollar, as the Asian evolution will have more effects surely than the possible Trump-Clinton election.

We are living a market crisis, but what are the alternatives for my money?

At the very beginning of the year, an analyst already mentioned the reasons of the bear market that we are still living.

1-year evolution in the main world markets

It is not only the crash in China and the aftermaths (slow economic development, cut in commodities demand), but there are many factors to explain. Just to quote them:

  • Oil price: far from be good news, the hard drop of the oil price could really show a weak demand, not a high supply. That means that the economic development could be worse. In addition, oil companies are highly indebted. With a low price, they will suffer to pay back.
  • Rising rates in US: The increase in the rates decided by the Fed last year will not be the last one in the next months. The economic development in US has some warnings this year and the central bankers prefer to watch instead of send a negative signal. Let’s see…
  • Deutsche Bank: recently added. One of the main European and world banks reported high losses, but the worst was the suspects about its solvency. Such crisis would put the euro in a hard position to continue existing.

Deutsche Bank YTD evolution

We could mention some others, but many people ask: are we living a recession again? Some analysts are very pessimistic, others stay in a middle position. In any case, the market evolution, which is driven by irrationality sometimes, is not a good economic crisis predictor.

The question is other. In former crisis, there have always been alternatives to move the money and obtain returns. What is currently the alternative? Stocks are dropping, investors are paying interests for the safest bonds, commodities are in the lowest points for years and traditional banking products offer very poor returns. The best to do:

  • Don’t panic: ups and downs are usual in markets. Even drops are common. If you have a strategy defined by your risk profile, keep it.
  • Don’t be obsessed by news: media are continuously bombing with negative news to get attention. Switch them off!
  • Don’t sell massively: the big mistake an investor can do is selling in a market sell-off.
  • Keep a long-term perspective: common investors are not traders. They invest to make future plans. If you do not need the money now, keep calm. Let’s wait till the landscape is clearer.

Why central banks are relevant for you, investor?

When you read the newspaper, you find always news about the Fed, the ECB, the BoE or the BoJ. These are the initials of the most important central banks: the Federal Reserve in US, the European Central Bank for the euro-countries, the Bank of England in Great Britain and the Bank of Japan. This year, another bank has emerged because of the influence of its decisions in the global economy: the People’s Bank of China.

What are these banks? They are not commercial banks, but they have relevant tasks for the economies. The origin of each is different: for instance, the Fed was created before de WWI after a deep banking crisis; the ECB is the result of an agreement amongst the countries which use the euro as a currency…

What are the main tasks? Well, central banks have the monopoly of printing money. Due to this responsibility, they control the monetary policy through the main instrument: the interest rate. This regulates the amount of money in the system. They are also lenders of last resort for commercial banks. Of course, the tasks can be wider depending the country. For instance, if the currency is pegged to another, they decide also the exchange rate.

Why do they have such influence? Governments delegate the monetary policy in these institutions. They usually have the mandate of controlling the inflation. This is the main role for the ECB in Europe. The mandate of the Fed, on the contrary, is double, because it has to take into account not only the inflation, but also the economic growth. Decisions have to be taken in order to achieve both.

As an investor, why are they relevant for me? You surely have heard the news in August about the drop of the stock exchanges. The origin was in the sudden decisions of the People’s Bank of China, which devaluated the yuan three times in three days. The worldwide effects can be perceived in this chart:

T-Advisor chart with the impact of the devaluation of the yuan in the stock exchanges last August

This is not the only example. The exchanges follow continuously the steps of these banks, as the interest rate has a relevant influence in the evolution of the economy or the companies. For instance, it is expected that the Fed tightens this year its monetary policy increasing the interest rate. The debate has been continuous since the last year and keeps on. As a result, the S&P was quite unstable in the last 12 months. It is relevant the drop before Christmas, when the Fed met for last time in 2014:

S&P evolution in the last year

The relevance of the Fed is also huge in the commodity markets, as they are nominated in dollars. In the case of the ECB, it has built an own vocabulary. It was famous with the former president Jean-Claude Trichet that the increase of the rates was announced two months before saying that the institution was “vigilant” with the price evolution and a month before saying “very vigilant”. The bank prefers to be foreseeable in order to avoid sudden market movements. Current chairman Mario Draghi was also famous, because his words defending the euro stopped the instability over this currency in 2012.

In any case, you, as an investor, should watch what the central banks say. If you are a trader, follow every word. If you are a long-term investor, take care of the statements to rebalance your portfolio in certain moments.

Crisis in August and the role of China in the current markets

This summer was especially stormy in the financial markets. The cocktail joined two ingredients:

  • First of all, the unending Greek crisis, which played its last show in July after the failed referendum. It is still doubtful if the last bailout will solve the problem or just delay it.
  • Secondly, the Chinese crisis. This is more important, as it showed that China has already a big influence in the world economy and finances. As it is explained by The Economist, the world became nervous. China is already a very relevant benchmark for investors.

The Chinese crisis has shown that the development in the world second (for a short term) largest economy is still weak, as it needs the strength of several institutions and mechanisms, besides its own model. The surprising devaluation was the signal that investors had to flee. However, as the T-Report chart shows, the performance of the Shanghai market is 41% higher compared with August 2014.

1-year chart of Shanghai Exchange

The problem is not limited to China, because the country is one of the main debt holders, commodity consumer and investor in emerging markets. As the dominoes, the pieces begun to fall:

  • The price of commodities is in the lowest point for years.
  • The emerging countries set the alert, as the outlook is that the Chinese commodity demand fall. Then, market evolution and economic forecasts began to be quite negative.

In the middle of this storm, the Federal Reserve showed doubts about the anticipated decision of hiking the rates. Under the current market conditions, the monetary institution thinks that this decision could be worse for future economic developments.

But the question for a common investor is: what can I do? Debt from developed countries offer low interests, developed exchanges drop and emerging exchanges, which formerly could help as an alternative, are even worse. Even China, which sailed in the middle of the Great Crisis with some success, shows its feet of clay. Then, what?

Comparative T-Advisor chart with 4 main exchanges

An investor strategy should be focused on capital preservation. These were our results in the T-Advisor European model portfolios, following this strategy:

Exchange

Loss in the last 30 days

Model portfolio loss in the last 30 days

DAX

-12.47%

-6.22%

IBEX 35

-11.3%

-7.42%

FTSE 100

-9.34%

-0.94%

The only solution in the current market turmoil is clear: good information about assets, tools to select the best ones, rebalancings and a strategy centred in capital preservation to reduce possible losses.

Global market trends: markets in January

This year has begun with the markets playing hard rock. The list of figures and events is long and all of them have effects on the markets. Obama declared the end of the crisis, radical left won in Greece, ECB began the European QE, China grew at the lower pace since 1990… Impossible to miss!

First of all, it is necessary to take into account a point in macroeconomics. IMF reduced its world growth outlook for 2015 last month. Amongst the risks, it is found the cheaper oil prices. Why? Yes, it pushes consumption and reduces industrial costs, but it can feed the deflationary trend. Deflation is very risky, as people tend to postpone investments’ and purchases’ decisions. Current price is around $50, but the pressure from Arabian producers could push it to a lower bar.

Global market trends in January in T-Advisor

Several experts have already warned that 2015 would be an unstable year for economics. However, US President Obama said in his State of Union address to the Congress that the economic crisis was over. American economy has experienced a recovery, but Federal Reserve is still reluctant to increase rates, as it does not perceive inflation risk. Although observers tend to think that the American central bank will hike rates in summer, it is still soon to have a clear perspective about that decision with the current instability.

US global trend in T-Advisor

In Europe, the ECB did finally what many economists recommended some months, even years, ago: an expansive monetary policy printing money. The European QE will expand ECB balance in €1 trillion, but effects will take at least six months. In any case, markets make their own party, till Greeks voted the radical left party Syriza in the last election. New Greek prime minister declared his intention to negotiate the country debt, but European partners do not agree. Markets have suffered abrupt ups and downs. Another point of instability was the Swiss National Bank decision to unpeg its currency from euro, which was not expected by investors.

Europe global trend in T-Advisor

Latin America is still the weakest world region. As the IMF comments, these countries are very dependent from oil and commodities. The current negative price trend for these products is punishing the market evaluation about the region.

Latin America global trend in T-Advisor

In Asia, China registered the lowest growth (“just” 7.4%) since 1990, which can show some weaknesses in its develop. These figures have partially stopped the soared trend since People’s Bank of China reduced its rates in November. In Japan, recent election victory by prime minister Abe guarantees that his expansive economic decisions will continue, but it is to see if they have effects after 25 years of weakness.

Asia global trend in T-Advisor

 

Markets deal with several risks in the short-term

The current world situation has some points of instability for the markets. Last year, the earnings were quite high after the financial crisis years, but 2014 began with a more complex landscape, mainly in the emerging markets, as we have written before in this blog.

Risks: Global trends in markets by T-Advisor

As we see in the chart above, the main trend is still bearish for all the markets. What is happening? The first problem has to do with central banks. Janet Yellen, new chairwoman in the US Federal Reserve, seems to be “dovish” as she prefers to delay somehow the taper of the quantitative easing or, at least, wait more for an increase of the interest rates (announced for 2015), not linked to a concrete unemployment rate. Is it good? Not necessary, if the Fed mentions in today’s and tomorrow’s meeting that the US economic recovery is slower than expected.

On the other side of the Atlantic, ECB chairman Mario Draghi announced surprisingly in last press conference that the institution will not take any decision in the monetary policy although the credit flows are still low, there are downside risks for inflation and the exchange rate euro-dollar is touching the psychological 1.40 $ border. This exchange rate is risky for European exports and has influence in the decrease of the inflation, as import prices pressure to lower prices. An outlook of lower prices is critical, because it delays consumers and investors decisions to buy.

In the Asian front, China worries the markets, as there are some dangerous signs related to the financial and the export sector, amongst others. But the markets follow carefully the developments in Ukraine. Recent political events in Crimea increased concerns for the effects of the economic sanctions imposed to Russia by the EU and US, apart from the risk of a conflict on the land.

Next weeks will be decisive to watch the evolution of the markets: will instability be part of 2014? Or are all of these risks just an exception in a possible upward trend?

Instability dominates emerging markets

Monetary policies in some countries experience a deep change after some years of relax due to the financial and economic crisis. US Federal Reserve is the machine in this movement. The announcement in December that the central bank reduced its debt purchases (broadly known as Quantitative Easing), originally focused to avoid deflation and promote an economic improvement, provoked an earthquake in the emerging markets. Why? Well, there were already signs in August, but these countries are now less attractive as the US bond rate outlook tends to increase.

Emerging markets benefit these years from capital flows from developed countries. Low interest rates and economic crisis in US, Europe and Japan put them in the investors’ focus. But the QE tapering continued in last week’s Federal Reserve meeting activated the alarms. The IMF alerted about a possible turmoil in developing countries, but it was too late: India, Brazil, South Africa and Turkey increased their interest rates to protect their currencies and keep the attractiveness for investors. In the particular case of Turkey, the central bank doubled the rates. However, volatility exploded and bears dominated markets. The following chart, extracted from T-Advisor, showed the five worst markets last week:

Emerging markets: Worst markets last week January 2014

But the effects multiplied and affected the whole world, as we can see in this chart from T-Advisor:

World markets last week January 2014

Possibly, the 1997-98 crisis will not repeat, as emerging markets have other strengths, but instability will be the next months’ market behaviour.

US Federal Reserve will tend surely to continue its tapering in a slow pace, but markets take into account that this year will be the last one with quantitative easing. Dollar will tend to be stronger and US bond will tend to increase. At the other side of the Atlantic Ocean, the ECB will tend to keep a flexible monetary policy, as Mr. Draghi observes some deflation risks. The open question is if the European Central Bank will act surprisingly as it did in November with an unexpected rate cut.

These changes in the world capital flows will have a deep impact in emerging markets. Investors should look for the best information to react immediately and avoid possible losses in their portfolios.

ECB rate cut: possible impact and effects

Mario Draghi and ECB Board decision of an interest rate cut last week surprised investors and markets. Traditionally, the European monetary policy institution rejected sudden rate cuts, but last inflation figures (from +1,1% in September to +0,7% in October for Eurozone) jointly with a strong appreciation of the Euro against Dollar (till its 2013 maximum in 1,38 $) were determined.

The immediate impact in the finance markets was positive: indexes rose as expected when such decisions are taken, but investors’ eyes are divided looking also the development of the other side of the Atlantic. Third quarter US GDP soared more than expected and increased the worries about a next tapering of the QE3 (that means, that the Federal Reserve could begin to shorten the current US debt buys to expand credit for a sooner reversal of the economic crisis). Markets changed the sentiment downwards.

The current situation of the monetary policy in the main world central banks is relaxing to push up the weak economies. Bank of Japan keeps the rate in 0%, the Fed near 0% and now ECB joins to the group not very far (0.25%). Analysts and experts have different points of view about the next consequences.

USB head for foreign exchange strategy, quoted by Reuters, sustained that ECB could have decided better the use of other instruments, as a negative deposit rate for banks, more long term cheap loans or even a quantitative easing, as in the US. These measures would have taken a bigger effect to push the credit flow, so USB expert, the main current worry for the monetary system. In the same way, a strategist of the private bank Berenberg, quoted by Spiegel, sustained that the cut “won’t hurt anything, but it also won’t do much either”.

The Economist also recalls that Mr. Draghi pointed “other artillery” if the rate cut weren’t enough. Japanese deflation and stagnation ghosts floated in Frankfurt last week. In any case, ECB moved perhaps because, as economist Paul Krugman says, the institution isn’t so sure that “Europe has turned the corner” of the crisis. However, it should be remembered that ECB mandate refers just to inflation control, not economic or employment improvement, as the Fed.