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The resilience of the markets is tested again

  • Risk Manager
  • Blog post submitted on 17th June 2014

Good morning!

Against a backdrop of aggravating geopolitical tensions investors somewhat shied away from stronger risk taking and shunned assets such as equities, peripheral bonds and emerging market stocks and currencies; conversely, the safer assets such as Germany bunds and US treasuries gained with Germany actually placing a 6 months bill at a negative rate of 0.0015%. To start off, Ukraine failed to abide by the deadline set by Russia for paying its gas bills and, in response, the Gazprom halt the gas supply though the flow to the rest of Europe remains in place; the negotiations between the two countries have been prolonging without success because the price demanded by Russia is about USD100 higher than the one agreed prior to this year’s political deadlock. Meanwhile, the situation in Iraq remains worrisome, which prompted President Obama to consider airstrikes against the Islamic militants in the country.

However, the weaker performance of the market is also likely to relate to the upcoming monetary policy meeting of the Federal Reserve, especially after a number of analysts and journalists pointed out that Carney’s (Bank of England’s Governor) cautionary statement revealed last week could soon be valid for the US. That is, after the policymaker stated that the increase interest rates could come sooner than investors expect, some inherently found an analogy in the growth path of the US and UK, with the former deemed to be lagging by several months. The economic data that came out yesterday also supported this view as the industrial production, capacity utilization rate and home builders’ confidence were generally above expectations. On the other hand, the IMF followed World Bank in revising its 2014 growth projection for US from 2.8% to 2%.

Overall, the European stocks retreated yesterday while the US equities balanced the positive data and the event risks and closed only marginally higher. The Asian market also lost some ground after the Foreign Direct Investments (FDIs) in China dropped 6.7% in May (year-on-year) and casino operators dropped after Macau took steps to shorten the stay of Chinese visitors with transit visas. Such data coming out ahead of the Fed meeting does not bode well for the emerging market, which might also be penalized by the news that the U.S. Supreme Court decided that Argentina must pay the bondholders who decided not to accept the 2001 restructuring offer in full when the payments to the remaining investors are made. That is, the country has to choose between not paying any of the bondholders (participators or not in the restructuring offer) or paying all of them; alternatively, it could seek to reach an agreement with the holdouts for a below-par value.

Today, the data coming out of the US will be skewed towards real estate (building permits and housing starts) and is deemed to be important especially since it follows yesterday’s strong reading on builders’ confidence (49 from 45 in May). However, the release of inflation could also impact the market if above or below expectations release will force investors to reassess their outlook on the interest rate path shortly before the Fed meeting. Earlier in the day, the European markets will be looking at the inflation in UK and Economic sentiment in the Eurozone.

Have a nice day!

Raluca

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