Monday, 15 December 2014

Markets fall as oil hits five-year low

Global markets suffered steep falls last week.

Stocks fell sharply, with the MSCI All-Country World Index falling 3.8 percent last week. The Standard & Poor’s 500 Index fell 3.5 percent. The STOXX Europe 600 Index plunged 5.8 percent, its worst week in three years. The MSCI All-Country Asia Pacific Index fell 2.0 percent.

Sentiment in stock markets were hurt by continuing declines in oil prices last week. West Texas Intermediate oil fell 12 percent, hitting its lowest level since May 2009 on Friday, while Brent fell 11 percent, hitting its lowest level since July 2009.

Oil touched its lows for the week after the International Energy Agency reduced its 2015 demand forecast by 230,000 barrels, the fourth cut in its forecast in five months.

The falls in stocks and oil hit speculative grade credit. The iShares iBoxx High Yield Corporate Bond exchange-traded fund fell 3.4 percent last week, the biggest decline since 2012.

Government bonds in financially-troubled economies also fell. Greece’s 10-year yield rose 192 basis points, the biggest weekly increase since May 2012.

Conversely, yields of government bonds considered safe havens fell. The yield on the United States 10-year Treasury note fell 23 basis points last week, the biggest decline since June 2012. The yield on German 10-year bunds fell 16 basis points.

Economic data last week showed strong growth in the US but weakness elsewhere.

In the US, retail sales rose 0.7 percent in November and the Thomson Reuters/University of Michigan's preliminary reading on the consumer sentiment index for December showed a rise to 93.8, the highest reading since January 2007, from 88.8 in November.

However, in the euro area, a report last week showed that industrial production rose just 0.1 percent in October.

In China, a report last week showed that industrial production rose 7.2 percent from a year ago in November, slowing from the 7.7 percent year-on-year increase in October. Trade shrank in November as exports rose 4.7 percent from a year earlier, down from an 11.6 percent rise in October, while imports fell 6.7 percent last month after having risen 4.6 percent the previous month.

Also last week, Japan revised down its third quarter GDP data to show a contraction of 0.5 percent, worse than the preliminary estimate of a 0.4 percent contraction. Another report showed that Japanese machinery orders fell 6.4 percent in October.

Thursday, 11 December 2014

Stocks fall as oil sinks

Markets fell on Wednesday. Bloomberg reports:

U.S. stocks led global equities lower for a third day, as a rout in energy producers spread to the broader market after oil sank to a five-year low. The yen strengthened with Treasuries as investors sought haven assets.

The Standard & Poor’s 500 Index dropped 1.6 percent, extending losses in afternoon trading as all 10 main groups slid at least 1 percent. West Texas Intermediate crude plunged 4.5 percent to settle at $60.94 a barrel, while Brent fell below $65 for the first time since 2009. The yield on 10-year Treasury (USGG10YR) notes dropped five basis points to 2.17 percent. The yen had its biggest three-day gain in more than a year. New Zealand’s dollar soared 1.7 percent at 5:34 p.m. in New York as the central bank said future interest-rate increases can be expected after holding borrowing costs steady today...

The MSCI All-Country World Index dropped 1.2 percent for a third day of losses. It was the biggest retreat since Oct. 10 and the lowest level since Oct. 30.

The fall in the S&P 500 on Wednesday was the biggest since 13 October. It has now fallen for three consecutive days after hitting a record high on 5 December, losing 2.4 percent in the process.

The US stock market's rally from the October low has clearly lost momentum for now.

Monday, 8 December 2014

Emerging market stocks lag as BIS warns of market fragility

Stocks in developed markets saw another strong rally last week but stocks in emerging markets lost ground.

In the United States, the Standard & Poor’s 500 Index rose 0.4 percent last week to a record high of 2,075.37. Helping to propel US stocks up last week was the employment report on Friday showing that the economy added 321,000 jobs in November, the most since January 2012.

The STOXX Europe 600 Index rose 1.1 percent last week to its highest level in almost seven years. European stocks rose even though the European Central Bank refrained from implementing quantitative easing at its monetary policy meeting on Thursday.

In contrast to the positive performance of stocks in developed markets, stocks in emerging markets fell last week. The MSCI Emerging Markets Index declined 1.9 percent, leaving it 1.7 percent down for the year to date.

Emerging markets could face further headwinds.

In its quarterly review published on Sunday, the Bank for International Settlements noted that with the Federal Reserve ending its quantitative easing, the US dollar has appreciated against most currencies, especially against those of commodity exporters. It warned that if the appreciation of the US dollar persists, it may have a “profound impact” on the global economy, and in particular, on emerging market economies where many firms have large US dollar-denominated liabilities.

The BIS also had a warning for financial markets as a whole. In its review, it noted that while financial markets remain buoyant, the spike in volatility in mid-October “underscore how sensitive markets have become to even small surprises” and “suggests that more than a quantum of fragility underlies the current elevated mood in financial markets”.

Indeed, the lagging performance of emerging markets could be a warning sign for the more buoyant developed markets.

At market tops, weaker stocks are often the first to decline. After investors unload the lower-quality stocks, selling then moves to the higher-quality stocks.

Insofar as emerging market stocks are generally considered of lower quality than developed market stocks, it is not inconceivable that we may have been seeing a market topping action unfolding in recent weeks.

Monday, 1 December 2014

Stock market rally may turn into bubble as oil falls

Global stocks mostly continued their rally in November even as oil extended its slump.

The positive performance of stocks is reflected in the MSCI All-Country World Index, which rose 1.5 percent last month.

Driving the rise in stocks were the United States and European markets. The Standard & Poor's 500 Index rose 2.5 percent and the STOXX Europe 600 Index jumped 3.1 percent.

In contrast, Asian stocks fell. The MSCI All-Country Asia Pacific Index fell 0.8 percent in November.

Stocks were boosted by a cut in interest rates by the People's Bank of China last month as well as suggestions by European Central Bank President Mario Draghi that it may increase monetary stimulus.

In contrast to stocks, oil prices plummeted in November, declining for the fifth consecutive month.

West Texas Intermediate oil fell 18 percent last month, the largest one-month percentage decline since December 2008. It fell 10 percent on Friday to close at its lowest since September 2009 after the Organization of the Petroleum Exporting Countries announced that it was keeping its production ceiling unchanged.

Brent crude oil also finished the month down 18 percent.

John Authers at the Financial Times thinks that falling oil prices could stoke a stock market bubble.

Authers wrote that cheaper oil provides a boost to the economy while lowering inflation. The latter in turn allows central banks to keep monetary policy loose.

“So if Opec will not act to keep a floor under the oil price,” he wrote, “this certainly stokes the risk that the current rally in the US stock markets carries on until it boils over into a bubble.”

Monday, 24 November 2014

US stocks hit record highs but outlook turning negative

Stocks in the United States rose last week, their fifth consecutive weekly gain, with benchmark indices hitting new record highs.

The Standard & Poor’s 500 Index rose 1.2 percent to 2,063.50. The Dow Jones Industrial Average rose 1.0 percent to 17,810.06.

Elsewhere in the world, the STOXX Europe 600 Index rose 2.9 percent but the MSCI All-Country Asia Pacific Index fell 1.3 percent.

Markets were boosted by actions by central banks last week.

The People's Bank of China announced on Friday that it was cutting one-year benchmark lending rates by 40 basis points to 5.6 percent and one-year benchmark deposit rates by 25 basis points to 2.75 percent.

Also on Friday, European Central Bank President Mario Draghi told an audience of bankers in Frankfurt that “we will do what we must to raise inflation and inflation expectations as fast as possible”, raising investors' expectations of further monetary stimulus.

Stocks are likely to continue to rally in the next few weeks as we approach the end of the year, traditionally a period in which markets do well.

However, further upside could be limited as stock valuations are already very high.

In a commentary on 13 November, the Federal Reserve Bank of San Francisco noted that the cyclically adjusted price-earnings ratio for the S&P 500 was 25.7, exceeding the long-run historical average of 16.6 and implying mildly negative real growth in stock prices over the next 10 years.

Furthermore, the ratio of New York Stock Exchange margin debt to GDP has risen to near all-time highs, and that similar sharp rises in the ratio in 1999 and 2006–07 were followed by major downturns in stock prices.

Tuesday, 18 November 2014

Nikkei 225 falls as Japanese economy contracts

The Nikkei 225 plunged 3.0 percent on Monday after the Japanese government reported that the economy contracted 0.4 percent in the third quarter, the second consecutive quarterly contraction.

However, US investors shrugged off the news. The S&P 500 rose 0.1 percent on Monday to close at another record high.