How Windy Is It . . . ? Monday, 13th June 2016 – No.183
Is the glass half full or half empty?
Last week investors decided that the glass was definitely half empty. Global markets were still digesting the weak May employment figures, a paltry 38,000 new jobs versus expectations of 160,000 seemingly postponing an expected June tightening by The US Federal Reserve. Fed Chair Janet Yellen seemed to support this stance in a speech in Philadelphia where she described the current policy as ‘generally appropriate’. Add to this the momentum of the Leave campaign in the Brexit debate, ongoing concerns over deflation in Japan and weakness in China and investors pressed the ‘risk off’ button.
As a consequence the global rally in Government bonds broke records on Friday while equity markets and sterling buckled. German, UK and Japanese sovereign bond yields all reached historic lows with the yield on the 10 year German Bund falling as low as 0.01%, Japanese bonds -0.15% and UK ten year bonds at 1.24%. Gold another clear indicator of the risk off trade rallied, up US$ 2 on Friday to reach a three week high of US$ 1,271 per ounce, while sterling fell by 1.6% against the US$ to $1.42. By way of contrast European equities suffered and the European Stoxx 600 index fell by 2.4% and the UK market by 1.8%.
Looking ahead to this week Monetary policy is again set to dominate with central bankers from the US Federal Reserve, Bank of Japan, England and Switzerland are all due to meet to make their June decisions on interest rates. Last week I pointed out that Behavioural finance suggest that people place too much weight on the latest piece of data and the market now only places a 4% chance of a June increase in US interest rates. If this proved to be an overreaction to the weak jobs data a June increase would now be a genuine shock. Veteran bond investor and ex CIO at PIMCO, Mohamed El-Erain warns against such complacency in today’s financial times. What seems certain is that markets will remain volatile ahead of the ‘Brexit’ vote as uncertainty abounds about both Leave or Stay and monetary policy worldwide.