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Ashburton Bond & Equity Comment - 07 Nov 2008
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Tuesday, 11 November 2008
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Fund Manager Comment
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Global Currencies & Interest rates
Wobbly equity markets and falling interest rates saw bond prices rally in the past week. UK gilts performed particularly well as the MPC elected to cut the base rate by 1.5% (the biggest such reduction since 1981) to 3% (their lowest level since 1954). Interest rates were also cut in Switzerland, Europe, China and Australia. The currency markets were relatively stable, with the weak pound being the most notable feature.
Asian
Asian equities gained ground for the second consecutive week as Barack Obama became president-elect. Central banks slashed interest rates globally in another attempt to provide stability to the financial markets and appease concerns of a global growth slowdown. Financials provided the biggest gains of the ten key sectors rising 5.1% during the week. There are continued worries over the ability of the consumer to spend at present with borrowing rates not falling in line with the central banks base rates. Crude oil fell below $60 a barrel, the lowest price in more than 20 months, which will be a boost for oil refiners as they seek to cut losses. India saw positive investment inflows from overseas investors during the week as money sat on the sidelines was put back into the market, albeit tentatively.
American
While last week the US made history with the election of the first African-American president, the markets did not share the same elation. The falls were mainly due to continued bad economic news. In particular, September factory orders declined 2.5%, and the unemployment rate rose from 6.1% to 6.5% (consensus 6.3%). The disappointments weren't confined solely to economic news either. Another wave of cautious-sounding guidance from corporate America also factored heavily in the action. GM announced that looking forward, the company will fall short in capital unless economic conditions improve, it can gain access to capital markets, can sell assets, or can secure government funding.
European
European markets fell slightly on the week as disappointing results re-ignited fears of a deteriorating outlook for profits and macroeconomic data continued to disappoint confirming recessionary woes. Eurozone manufacturing PMI sank to a low of 41.1, the EC slashed its forecast for economic growth, German industrial output and factory orders plunged and HBOS reported another 2.2% fall in UK house prices. On Thursday, the MPCs dramatic and unexpected 1.5% rate cut briefly boosted markets before the more cautious action of the ECB, (-0.5%) depressed share prices. The Swiss National Bank later joined the throng with a surprise 0.5% cut. Some comfort can be taken from the impact of recent rate cuts on the money markets rates which continue to decline.
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Ashburton Strategy Note - 30 September 2008
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Thursday, 16 October 2008
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Fund Manager Comment
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Strategy Note - 30 September 2008
On Monday night, US politicians voted to reject the Paulson plan to rescue the American banking system. This was definitely not in the script and resulted in one of the sharpest stock market one-day falls ever registered on Wall Street.
Big moves like this are always unsettling. However, we would make several observations. First, there is a good chance that some sort of revised version of the Paulson plan will be passed later this week. Indeed, the big fall in the stock market should have rammed home exactly what is at stake here. Even if it doesn’t pass, that may be a good thing. The original package was widely thought to be flawed. It sought to help the banks by buying some of their illiquid mortgage-backed and asset-backed loans. But at what price? Too low a price and there would be nothing in it for the banks. Too high and tax payers would be outraged. In short, ‘plan A’ was too complex and possibly even ineffective. There are plenty of alternative policies being proposed: recapitalising the banks directly (as in Europe); suspending market-to-market accounting (which has arguably turned this drama into a crisis) and further cuts in interest rates. The rejection of ‘plan A’ may mean that a better ‘plan B’ ultimately swings into action.
Second, many of the contrarian signals that were suggestive of a low two weeks ago are now at even more extreme levels. Take for instance the Vix index, which measures the cost of portfolio insurance. Having hit a new high for the year on 17 September, it has now hit levels last registered in October 98, September 01 (remember 9/11?) and July 02 – all months that heralded stock market recoveries lasting months rather than weeks.
Third, slowing economic growth and the sagging oil price suggest that we are moving slowly towards ECB rate cuts. During a credit crunch the efficacy of interest rate policy is reduced because lenders can’t lend and borrowers can’t or won’t borrow. However, Europe is not America. Spain and Ireland may look like extreme versions of the United States, but Germany (representing a third of the Eurozone economy) didn’t actually experience a residential property bubble at all. Combine this fact with Europe’s more direct approach to managing its banking crisis (Europe has never had qualms about using taxpayers’ money to prop up ailing businesses) and one might, repeat might, have a recipe for a more sustainable turnaround. Note that historic price-earnings multiples in Europe are back to the levels prevailing at the lows in 2002/3 and are roughly half their equivalents in America.
Fourth, it is clear that policy is shifting in China. For some time, its leaders have been talking about the need to promote domestic consumption to reduce its reliance on export-led growth. The crisis in America has injected a sense of urgency. And crucially, there is much that China can do to help things on their way: increased fiscal spending, tax cuts and an easing up on credit restrictions. Looking to the long-term, there will be moves to reduce the country’s incredibly high savings rate by improving the social safety net. Like Europe, China-related shares are trading on valuations that are very much at the attractive end of the historic range.
Fifth, historical trading patterns give some room for optimism:
The median bear market on Wall Street has seen the S&P 500 drop 27% in 363 days. The current count is -30% in 354 days. This bear would appear to be long in the tooth.
Some of our longstanding clients may remember our ‘bubble roadmap’. Based on the behaviour of a number of different markets in their post-bubble phase (gold in the 80s, the Nikkei in the 90s and so forth), the roadmap proved to be very useful in forecasting the decline and subsequent recovery in the NASDAQ earlier this decade. Having called for a high in July 2007, it is now calling for a rally into 2010, starting December 2008.
Wall Street typically performs well in an election year. The one big exception to this rule is when the Republican Party is booted out of office, in which case the market performs poorly into November. But even then the market enjoys a year end rally.
Finally, it is important to retain a sense of proportion. Equity markets are already stabilising. Chinese and Indian markets all closed up on Tuesday, having been sharply lower at the open. European markets were also up yesterday and the American market has recovered a large proportion of its big fall. Monday’s move was unnerving, but many indices are still above their low of two weeks ago.
Unfortunately, there are some nasty negatives to offset these positives. The economic outlook is pretty bleak. The credit crunch is a self-feeding vicious spiral that has already claimed a number of big name institutions. Every day that the politicians prevaricate, there will be more failures and increased odds of a serious economic dislocation.
The bottom line is that we feel it is too late to reduce equities. Equally, significant economic risks argue against buying at this stage. For the time being we will retain a defensive spread of investments, with a decent weighting in cash. On the equity front, we retain our long-term positive view on Asia. With hindsight we should have cut back our exposure at the turn of the year when valuations were overcooked. But as stated above, valuation is no longer a problem. We are considering a reduction of our US weighting in favour of Europe. On the bond front we own US inflation-linked bonds, well-rated sovereign Eurobonds (mainly European) and a small weighting in credit. Bonds are in the ascendancy at the moment, but that will change if the authorities get serious about dealing with this crisis.
Peter Lucas
Global Investment Strategist
Ashburton (Jersey) Limited
30 September 2008
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Ashburton Bond & Equity Comment - 12 Sept 2008
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Tuesday, 16 September 2008
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Fund Manager Comment
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Global Currencies & Interest rates
The US dollar was largely unchanged on the week, although this masks a sharp fall of 1.3% on Friday. Optimism over the bailout of Fannie and Freddie at the start of the week was largely overtaken by fears over growth, and the imminent collapse of Lehmans. The implied probability of a rate cut by the Fed next Tuesday has jumped sharply over the last few days, whereas there is far less conviction over the prospects for a cut out of the ECB any time this year. From a technical perspective we expect further dollar weakness over the coming weeks as it moves from an extremely overbought position.
Asian Markets
Asian stocks fell for a second week, with concerns that slowing global growth will curb demand, overshadowing a rally in financials after the US Government sponsored entities, Freddie Mac and Fannie Mae were nationalised by the US government. Stock volatility persisted as political instability continued to dominate the region with North Korea’s leader, Kim Jong-Il this week being hospitalised, Thailand’s PM Samak Sundaravij being removed after protests and Malaysia still operating without a premier. Nine of the ten MSCI Asia Pacific industry sectors declined in another tough week for equities, with the Hang Seng Index losing 2.9% on the week.
American Markets
US indices closed the week slightly higher, bouncing as the oil price eased back and as investors took the Federal Reserve’s nationalisation of the two mortgage groups, Fannie Mae and Freddie Mac in their stride. However, financial news has since gone from bad to worse as Lehman Bros and AIG have fallen dramatically as investors questioned their ability to finance themselves. This has led to Lehman’s bankruptcy this weekend, as the Fed refused to step in and help. Consumer related issues made some progress, as did defensive stocks, although basic materials also benefited from short covering.
European Markets
European markets rose 1.6% on speculation the U.S government’s takeover of Fannie Mae and Freddie Mac would shore up the mortgage market, sending financial and construction companies higher. The euphoria of surging markets was short lived and by mid week the bears re-gained control. Brent Crude and gold plummeted sending mining and energy companies lower as investors speculated the economic slowdown would hurt demand for raw materials. Growing inflationary expectations and waning confidence led the EU Commission to cut its forecast for the region’s economic growth and disappointing macro-economic indicators did little to boost sentiment. Friday saw a stronger financial sector regain some lost ground as speculation that Lehman would be sold provided much needed relief for the sector.
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Ashburton Bond & Equity Comment - 05 Sept 2008
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Tuesday, 9 September 2008
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Fund Manager Comment
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Global currencies and interest rates
It has been another week of broad US dollar strength. However, as had been the case in recent weeks, only the Japanese yen outperformed the US dollar among the G10 currencies. Despite the fact that an important determinant in the US dollar’s resurgence has been weaker growth elsewhere, particularly in the Eurozone, sterling has continued to underperform the euro. The Australian dollar was the worst performing G10 currency over the week after the Reserve Bank of Australia lowered interest rates for the first time since 2001 from 7.25% to 7.00%.
American markets
The shortened week in the US saw no lack of trading. The oil price fell after hurricane Gustav’s relatively benign passing, leaving minimal damage to the oil infrastructure. The fall in oil was slightly out of line seeing that it had not run up ahead of the hurricane. However, this did not re-inflate the markets. There were some weaker than expected earnings reports, also the unemployment rate ticked up further than expected. This all helped pull the markets down, worryingly on rising volume. The big news came over the weekend, with the bail-out of Fannie Mae and Freddie Mac. This should ease credit conditions and set the tone for the week ahead.
Asian markets
Asian stock markets suffered this week (completing their largest weekly decline in more than a year) on further concerns that growth will slow denting demand for raw materials and other goods. Political turmoil returned to the region with Japan’s Prime Minister, Yasuo Fukuda, stepping down and Thailand’s Premier declaring a state of emergency following violence in the capital. Japan’s Topix index closed down 4%, with the wider Asian region MSCI Asia Pacific index down 6.7%. All 10 industry groups closed down on the week, with energy and mining companies posting the largest losses.
European markets
European markets fell sharply with basic material and energy companies leading as commodity prices plummeted, macro-economic indicators disappointed and the euro weakened. Energy stocks tumbled after hurricane Gustav proved less destructive than expected, reducing the risk to US offshore oil production. Crude oil plummeted 7.1% on the news and, boosted by an appreciating US dollar, metals followed. Markets were driven lower after the European Central Bank and Bank of England left base rates unchanged, as inflationary concerns make it increasingly difficult for policy makers to respond to the risk of recession. German factory orders unexpectedly fell followed by consumer spending, company investment and exports, increasing the likelihood of recession in Europe’s largest economy.
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Ashburton Bond & Equity Comment - 29 August 2008
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Wednesday, 3 September 2008
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Fund Manager Comment
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Global Currencies & Interest rates
The US dollar has been far more stable this week but it was still, along with the Japanese yen, the best performer within the G10 currencies. Part of this was related to better-than-expected activity news in the US, especially the durable goods orders and GDP data that underlined the strength of US exports despite the backdrop of slowing global growth. It was an eventful week for the euro, which at first depreciated following a very weak German IFO survey and lower-than-expected inflation numbers. However, it has since recovered, helped by relatively hawkish comments from several ECB officials. This has meant that despite its volatility during the week, the euro has been in the middle of the pack in terms of G10 currency performance. Sterling was the G10 loser last week following bleak UK data flows. The yield on the 2 year gilt fell to its lowest level since May suggesting several rate cuts from the Bank of England are inevitable in the coming months.
American
The US markets saw a volatile week and closed slightly lower, despite a rally from beaten down financial stocks, still embroiled in their troubles. Volumes were very low ahead of the Labor Day holiday and this added to the unpredictable nature of the market. Economic news added a glimmer of hope with a number of key reports – new home sales, consumer confidence, durable goods and GDP all better than expected. These statistics will have been massaged by the recent fiscal stimulus package but revised second quarter GDP at +3.3% (up from+1.9%) does reflect that the US economy is at least alive.
Asian Markets
Asian equity markets rebounded (MSCI Asia +3%, Nikkei +3.2%) this week after a decent second quarter growth figure from the US and generally better than expected earnings reports across the region provided some short-term relief. In Japan, more positive domestic data and a government stimulus package outweighed bankruptcy announcements from two real-estate developers and a skipped dividend payment from capital goods heavyweight IHI Corp. Despite some excellent stock-specific stories, the JGB market remains unconvinced of a sustained recovery as yet. Elsewhere, volumes remain uninspiring with nervous investors continuing to use any bounces as profit-taking opportunities.
European
European markets moved higher (+1.6%) with financials returning to favour and energy stock in focus as Hurricane Gustav looks to disrupt oil supplies in the Gulf of Mexico. Despite this, so far the oil price has remained in a tight range. The euro hit a six month low against the dollar as German IFO business survey index fell to its lowest for three years and economic sentiment remains poor. ECB and Bank of England meet this week to decide on interest rates.
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Ashburton Bond & Equity Comment - 22 August 2008
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Wednesday, 27 August 2008
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Fund Manager Comment
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Global Currencies & Interest rates
The US dollar was relatively stable against the other major currencies for a large part of last week but it has begun to depreciate in recent sessions. Crude oil prices have yet again been the key driver behind this price action. The front-month contract for WTI oil has risen sharply above $120, partly due to renewed geo-political tensions between the US and Russia. The recent rally in oil prices seems likely to continue over the short-term, especially since CFTC data suggest the speculative community is short oil futures. This should continue to weigh on the US dollar over the next week.
Asian Markets
Asia posted further losses (MSCI Asia -2.6%, Nikkei -2.6%) as worries over global growth continue to weigh on sentiment. Volumes remain anaemic, with aggressive investor participation unlikely given the ongoing debacle in the American housing and banking sectors. Domestically, Japan found itself under pressure following additional bankruptcies in the real-estate sector, whilst other regional markets remain range-bound as investors continue to digest corporate earnings. The fact remains that whilst valuations have returned to attractive levels, extreme volatility and choppy conditions are keeping many on the sidelines.
American
The major headlines this week were predominately negative. Fannie Mae and Freddie Mac were considered to be on the verge of needing to be rescued by the US Treasury. Fortunately it wasn't all bad, Hewlett-Packard turned in another solid earnings report and provided a reassuring outlook. However, volume has been anaemic the past week, NYSE volume failed to exceed 1.0 billion shares on three occasions. This may be partly to do with seasonality but it clearly indicates that there wasn't a lot of conviction in this week's trading action.
European
European Markets fell slightly on the week (DJ Stoxx 600 -1.5%) after the steepest decline in UK house prices since 2002 and continued fear of further losses dragged down banks and consumer companies. European macro data was generally bearish, UK GDP was revised downwards to 0% for Quarter 2 2008 and the Germany ZEW confidence index plummeted, overshadowing gains in commodities (Brent + 5.3%, Gold + 4.7%.).
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Ashburton Bond & Equity Comment - 15 August 2008
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Wednesday, 20 August 2008
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Fund Manager Comment
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Global Currencies & Interest rates
While the upward pressure on the US dollar had been building over the past few weeks, its move beyond important technical levels at the end of last week was the trigger for what has been the most dramatic rally in the US dollar in several years. Euro /US dollar now looks set to test the 1.45 level. In the UK, the August Inflation Report published by the Bank of England this week was very dovish relative to expectations. Prospects for the UK have clearly deteriorated to the extent that the MPC is now likely to cut interest rates as early as the next few months. The Australian dollar has unsurprisingly been among the biggest losers from the market's reassessment of the risks to global growth. The decline in Australian dollar /US dollar has been driven by both a liquidation of long positions, as well as a shift in fundamentals - both relative interest rates and commodity prices - against the Australian dollar.
Asian Markets
Asian stock markets posted a mixed week. Japan’s Topix index closed 1% lower over worries about bank earnings following a crisis in the Japanese real estate sector, whilst the tech heavy Nikkei rose 0.6% inline with gains in the Nasdaq in the US. Worries over rising interest rates hit Chinese related stocks, even though inflation data came in better-than-expected and heavy falls in both index heavyweight financial and commodity related counters dented sentiment.
American Markets
With the US markets having recovered 8.0% from their lows, it was time for a consolidation period. However there was plenty going on. Most prominent of which was the continued strength in the dollar and the continued weakness in commodities. The consumer price index for July didn't bring good inflation news. Both headline and core-CPI were higher than expected. Year on year CPI was up 5.6%, while core CPI was up 2.5%, which is outside the Fed's comfort zone. The market though, managed to digest the CPI report rather well on the presumption that lower commodity prices and a stronger dollar will lead to improved inflation readings in coming months.
European markets
European equities changed little over the week, falling slightly as concern deepened that banks will report more losses and the economic slowdown will drag down earnings, offsetting earlier gains as rapidly falling commodity and energy costs eased pressure on reliant industries. In the UK the CPI accelerated 4.4% Year on year for July. In the Euro zone, GDP contracted 0.2% in Quarter 2, whilst July inflation remained stable. In Germany, the economy slowed less than expected in the second quarter at 0.5% quarter on quarter. The dollar continued to strengthen remarkably against sterling and the euro lifting exporters.
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Ashburton Bond & Equity Comment - 8 August 2008
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Wednesday, 13 August 2008
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Fund Manager Comment
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Bond and equity comment
Global currencies and interest rates
The week ended with the US dollar as the best performing G10 currency and euro/US dollar breaking the very bottom of its range support over the past few months of 1.5280. Fundamental drivers of this week's sharp decline in euro/US dollar have included continued weakness in oil prices and a dovish press conference by the European Central Bank. The elimination of the export surrender requirement of the foreign revenue of Chinese companies, which would slow the pace of reserve accumulation in China and reduce the scale of reserve management flows away from the US dollar to other major currencies, may also be weighing on euro/US dollar. The commodity currencies performed even worse than the euro against the US dollar, partly linked to concerns about a broader slowing in global growth and the associated weakness in commodity prices, unsurprisingly the worst performing G10 currency was the Australian dollar.
Asian markets
Asian equity markets continued to struggle (MSCI Asia -2.7% / Nikkei 0.6%) on the back of a further correction in the oil price and commodity complex, suggesting weakening global demand and the possibility of downside risks to growth estimates. Although the move will alleviate some of the cost pressures in the short-term for both governments in the form of subsidies and companies at the margin, general nervousness within the investment community is keeping money on the sidelines. Sectors such as metals, mining and shipping were sold off sharply, whilst interest rate sensitive stocks outperformed on expectations of impending interest rate cuts across the region.
American markets
Last week saw the markets make meaningful progress led by the consumer stocks. This was driven by an 8% drop in crude prices over the week. Government sponsored enterprises, Freddie Mac and Fannie Mae, both reported huge quarterly losses, as did Dow component AIG. Although these stocks were beaten back in material fashion, the financial sector held its ground for the most part. The Fed elected to leave the fed funds rate unchanged at 2.00% and provided a policy directive that left market participants inclined to think there won't be a tightening anytime soon. The second quarter's productivity figures reported unit labor costs rose just 1.3% from the first quarter. That was a slower rate of increase than seen in the prior two quarters and added more fuel to fire for the fed to keep rates stable.
European markets
Following Jean-Claude Trichet's pessimistic comments on the Euro zone economy, the euro declined significantly against the US dollar (at 1.504). European markets rallied 3.2%, whilst Brent Crude and gold dropped spectacularly by -7.9% and 6.3% respectively. In the UK, the PMI services for July bounced back lightly (47.4). In Germany, June factory orders fell 2.9% on the month and Industrial production bounced back 0.2% after a 2.4% decline in May. The German trade balance progressed to €19.7 billion for June.
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Ashburton Bond & Equity Comment - 1 August 2008
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Friday, 8 August 2008
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Fund Manager Comment
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Bond & Equity Comment - 01/08/2008
Global Currencies & Interest rates
The major currencies were little changed, relative to each other, compared with a week ago. However, this reflected offsetting news (not an absence of). The oil price fell towards its lowest level for several months, before recovering to some extent following surprisingly low gasoline inventories levels in the US. It remains the key driver of the US dollar crosses, and particularly euro/US dollar, which moved in the same direction and by roughly the same size.
Asian Markets
It continues to be a case of two steps forward, three back for Asian equity markets (MSCI Asia and Nikkei both -1.8%), as more negative news from the Australian banking sector suggested the total amount of toxic debt that needs to be addressed in the system will be greater than anticipated. Toyota led Japanese exporters down after cutting its sales forecast on weaker than expected American demand, whilst regional shippers also struggled as trade between Asia and Europe fell for the first time in seven years, according to Lloyd’s List. High volatility and aggressive sector rotation are making for an extremely challenging market environment, with inflation and oil news largely dictating market direction.
American Markets
It was a volatile and active week of trade, although the end result wouldn't suggest this – the S&P 500 posted a slight 0.2% gain. The economy expanded in the second quarter, albeit at a moderate pace. Second quarter GDP rose 1.9%, aided by the fiscal stimulus package, although the result was lower than the expected 2.3% gain. Meanwhile, the unemployment rate rose to 5.7% from 5.5%. In corporate news US Steel posted blowout second quarter earnings of $5.65, which more than doubled compared to the previous year. Strong global demand and pricing power aided the huge upside surprise. Steel companies as a whole rose 4% for the week.
European Markets
European equities fell slightly over the week despite positive consumer confidence. Figures in the US and better-than-estimated earnings reports from Siemens AG and ArcelorMittal, provided the markets with an early lift. Towards week-end, rebounding oil prices (+1.9%) driven by supply side threats from Iran and Nigeria dragged down industrials and the release of more negative results helped erase earlier gains. Economic indicators continue to disappoint, the French INSEE’s consumer confidence survey maintained its decline at -48 in July, whilst housing starts and building permits were also down.
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Ashburton Bond & Equity Comment - 25 July 2008
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Tuesday, 29 July 2008
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Fund Manager Comment
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Global Currencies & Interest rates
It was a volatile week across financial markets, and much of the attention was on the
US dollar, which fell to record lows against the euro hitting 1.6038. Equity markets were
under severe selling pressure for the most part of this week, led by financial stocks. The
problems facing Fannie Mae and Freddie Mac have highlighted once again the ongoing
strains in the global banking sector. Sterling continued to surprise and was the top
performing G10 currency over the week.
Asian Markets
Asian equities suffered another down week, falling 5 out of the last 6 weeks, to levels last
seen in October 2006. Concerns over slowing global growth and further credit related
problems in the US outweighed any positive headwinds from falling crude oil and
commodity prices for the region. India rebounded strongly towards the end of the week, as
India’s economy is particularly geared to a falling oil price.
American markets
The week certainly began on an unsettling note, as the financial sector plummeted 6%
Monday, marking its biggest loss in more than eight years. That decline was noteworthy for
a couple of reasons. First, it occurred amid concerns that IndyMac's failure was a harbinger
of many more bank failures. Secondly, it came despite a plan announced by Treasury
Secretary Paulson that essentially turned an implicit guarantee of the debt of government
sponsored enterprises Fannie Mae and Freddie Mac into an explicit one. Aside from all the
turmoil in the financial sector, second quarter earnings started to pick up pace. Companies
like United Technologies, Honeywell, Johnson & Johnson all exceeded estimates, offering
an important reminder that the earnings environment outside the financial sector isn't as
bad as one might think.
European Markets
European equity markets rebounded this week as oil dropped to $130 and the earnings
season brought better than expected results from investment banks. DJ Stoxx 600 rose
3.3% with the turnaround lead by a dramatic rally in financials. CPI in June came in well
above target in the Eurozone and UK at 4% and 3.8% year-on-year respectively. In
Germany, the ZEW confidence index slumped to an all-time low in July.
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Ashburton Bond & Equity Comment - 18 July 2008
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Tuesday, 22 July 2008
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Fund Manager Comment
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Global Currencies & Interest rates
It was a volatile week across financial markets, and much of the attention was on the US dollar, which fell to record lows against the euro hitting 1.6038. Equity markets were under severe selling pressure for the most part of this week, led by financial stocks. The problems facing Fannie Mae and Freddie Mac have highlighted once again the ongoing strains in the global banking sector. Sterling continued to surprise and was the top performing G10 currency over the week.
Asian Markets
Asian equities suffered another down week, falling 5 out of the last 6 weeks, to levels last seen in October 2006. Concerns over slowing global growth and further credit related problems in the US outweighed any positive headwinds from falling crude oil and commodity prices for the region. India rebounded strongly towards the end of the week, as India’s economy is particularly geared to a falling oil price.
American markets
The week certainly began on an unsettling note, as the financial sector plummeted 6% Monday, marking its biggest loss in more than eight years. That decline was noteworthy for a couple of reasons. First, it occurred amid concerns that IndyMac's failure was a harbinger of many more bank failures. Secondly, it came despite a plan announced by Treasury Secretary Paulson that essentially turned an implicit guarantee of the debt of government sponsored enterprises Fannie Mae and Freddie Mac into an explicit one. Aside from all the turmoil in the financial sector, second quarter earnings started to pick up pace. Companies like United Technologies, Honeywell, Johnson & Johnson all exceeded estimates, offering an important reminder that the earnings environment outside the financial sector isn't as bad as one might think.
European Markets
European equity markets rebounded this week as oil dropped to $130 and the earnings season brought better than expected results from investment banks. DJ Stoxx 600 rose 3.3% with the turnaround lead by a dramatic rally in financials. CPI in June came in well above target in the Eurozone and UK at 4% and 3.8% year-on-year respectively. In Germany, the ZEW confidence index slumped to an all-time low in July.
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Ashburton Bond & Equity Comment - 11 July 2008
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Tuesday, 15 July 2008
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Fund Manager Comment
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Global Currencies & Interest rates
It was a relatively quiet week in terms of economic news and, as such, moves in the G10 currencies were relatively small. The Norwegian krone stood out as the under performer following the decline in oil prices and slightly lower than expected inflation data. There continues to be a lot of attention on the weakness in equities but the spillover to FX remains limited, with most high-yielding currencies outperforming the Japanese yen and Swiss franc.
American Markets
It was a difficult week for the markets with both the Dow and S&P 500 dropping just shy of 2%. However, the small caps made some progress. Once again the financial sector and oil prices were the primary swing factors. Government sponsored enterprises Fannie Mae and Freddie Mac were a source of volatility for the market, as speculation ran rampant that they were destined for a government bailout (came through on Sunday). Elsewhere, there were plenty of corporate headlines outside the financial sector to digest. Dow Chemical announced its intent to acquire Rohm & Haas for $78 per share in cash. That price marked a 74% premium. Alcoa officially kicked off the second quarter earnings reporting season with in-line profit reports. The report did not move the market much since it was pre-occupied with the Fannie Mae-Freddie Mac saga.
European Markets
European markets continued to decline (DJ stoxx 600 -3.2%) as concern deepened that financial firms will need to raise more capital and that the economic slowdown and waning consumer demand will hurt earnings. Macro data was equally bearish. In Germany, industrial production dropped unexpectedly and the trade surplus declined to Euro 14.4bn (May) and French industrial production also fell. Crude oil continued to rise on wide ranging supply concerns, escalating tension between Israel and Iran, renewed militant activity in Nigeria and the threat of Brazilian strikes. The BoE kept the base rate unchanged at 5%.
Asian Markets
Asia completed a range-bound week little changed with events in the American mortgage market continuing to dictate global investor activity. Despite the muted benchmark move, China finally gained some traction after several positive catalysts restored short-term confidence. Rumours of a better than expected inflation figure to be announced later this month, several stunning profit reports from the banking sector and comments from the PBOC about restoring confidence in the property market resulted in a rally of 8%. However, a weaker than expected GDP figure from Singapore and a shocking inflation figure from India clouded sentiment and prevented any aggressive regional participation.
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Ashburton Bond & Equity Comment - 04 July 2008
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Tuesday, 8 July 2008
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Fund Manager Comment
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Global Currencies & Interest rates
As expected, the ECB raised rates by 25bp in its meeting last week. The move had been widely anticipated but the accompanying press conference was rather more dovish than the market forecast. The continuing rise in the price of oil is adding to upside pressures for euro/US dollar whilst downside risks to growth appear to be mounting in the UK. Given that, it has surprised many people that sterling has not been weaker.
European Markets
The downward trend continued on the European markets with stocks falling for a fifth consecutive week (DJ Stoxx 600 – 2.4%) as higher oil prices and reports on housing and manufacturing suggested the economy will continue to weaken. UK data was particularly negative as housing prices sank the most since the last recession and the PMI manufacturing fell sharply. German factory orders contracted and the eurozone PMI services were revised downwards. As expected, the ECB raised its key rate by 25 basis points to 4.25%.
American Markets
With the 4th of July holiday on Friday, it was a short week of trading. It was also a volatile week of trading, accented primarily by a negative bias that was tied to ongoing concerns about the financial sector, rising oil prices, earnings disappointments and the deteriorating state of the U.S. auto industry. The most important report of the week was the June employment report. Nonfarm payrolls declined more than expected, however, the unemployment rate did say stable at 5.5%. Despite the new high in oil prices the energy sector lost ground. Concerns about demand destruction due to higher prices triggered selling interest in oil-related stocks.
Asian Markets
Asian equity markets suffered another torrid week as worries over inflation and rising input costs are expected to result in weaker than expected 2nd quarter earnings results. The bears are clearly in control as present, and sentiment remains at extreme lows. Japan’s Nikkei index was marked down every trading day, with exporters sold-off sharply on poor US vehicle sales as the consumer begins to feel the pinch of +$140 a-barrel oil. Elsewhere in the region, India’s woes continued as inflation spirals towards 12%, suggesting further monetary tightening measures are likely to be introduced sooner rather than later.
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Ashburton Bond & Equity Comment - 27 June 2008
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Tuesday, 1 July 2008
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Fund Manager Comment
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Global Currencies & Interest rates
As equities fell sharply over the week, a shift in risk appetite was apparent in the FX markets with the Japanese yen and Swiss franc being the major beneficiaries. Inflation expectations still loom large over the rising oil price and this has kept LIBOR spreads at elevated levels, particularly in Europe.
American markets
It was not a good week for the stock markets, as the S&P 500 fell 3.0% and the Dow hit its lowest level since September 2006. Record high crude prices, tumbling financials and less than stellar outlooks from tech companies took a toll on market sentiment. The focal point for the week was the FOMC announcement on Wednesday and as expected, the Fed left the fed funds rate unchanged at 2.00%. The Fed said overall economic activity continues to expand, partially due to "firming" in household spending. However, the Fed expects economic growth will face the burdens of tight credit conditions, housing contraction and the rise in energy prices.
Asian Markets
Asian markets posted another negative performance, with sentiment levels fast approaching extreme lows. Oil continues to dominate investor activity and with crude hovering around the $140 a barrel mark, several countries in the region (Thailand, Indonesia, the Philippines and particularly India) faced another bout of indiscriminate selling due to high inflation levels, deteriorating current account positions and central banks that are perceived to be behind the curve. Regional markets remain very much trading-orientated, with heavy sector rotation and a clear lack of leadership creating a challenging environment.
European Markets
European markets fell for a fourth week on concern credit losses will reduce bank earnings and higher energy and raw material costs will depress profits for retailers. Consumer confidence fell in France and Germany (the lowest in more than two years) as soaring inflation (Crude +$140) sapped households’ purchasing power. Real estate companies were sent lower as UK mortgage approvals declined to the lowest since 1997 as the Rightmore house price index fell 1.2% in May.
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Ashburton Bond & Equity Comment - 20 June 2008
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Tuesday, 24 June 2008
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Fund Manager Comment
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Global currencies and interest rates
Fixed income markets had another rollercoaster week and the FX market remains focused on inflation risks and the likely policy response. The lack of clarity about central banks' possible actions has added to investors' uncertainty about FX prospects. There seem to be relatively few strong convictions in the market at present. At the heart of the uncertainty is the response of the Fed. Various statements by FOMC officials had supported the US dollar over recent weeks but market participants remain very uncertain whether the Fed will be able to raise rates. Even if FOMC members continue to stress inflationary concerns, the impact of their words is likely to be subject to diminishing marginal returns if unaccompanied by actions. If they are not, euro and US dollar could quickly depreciate back towards 1.60. Indeed, this week the US dollar underperformed all other major currencies.
American markets
US markets continued to disappoint investors with a week of sharp falls being seen. Friday saw the steepest falls of the week and led the indices to three month lows as investors fretted over mortgage losses and losses by banking groups. Results from several of the leading banks whilst poor were in fact better than worst expectations. However, Goldman Sachs warned that US banks may need to raise a further US$65bn in capital to remain liquid. Fifth Third Bank cut its dividend and announced it was raising further capital as confirmation of this. Economic data reflected continued difficulties with housing starts falling to a 17 year low, and industrial production weaker and producer prices rising.
Asian markets
Asian markets remain hostage to events overseas as fresh capital-raising efforts from several major banks reignited concerns over further credit write-downs, whilst continued poor US spending data suggested falling house prices and an exceptionally high oil price are squeezing the American consumer. Domestically news was light, although India’s weekly inflation figure of 11.05% was far higher than expected and led to fears of further monetary tightening. In China, the government announced a series of fuel increases to more closely align local and international prices, and also an estimated £3bn in subsidies to help poorer families cope with rising costs. Most regional indices were marked down between 1 and 4%, with any short-term bounces being used as profit-taking opportunities.
European markets
European markets posted a third week of declines, on speculation financial companies will suffer further losses and a slowing economy will erode earnings for retailers and property companies. Rising energy and raw material costs continue to pressurise the markets, particularly the price of oil which remains near its all time high. In Germany, the ZEW indicator of economic sentiment fell sharply (June).
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Ashburton Bond & Equity Comment - 13 June 2008
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Wednesday, 18 June 2008
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Fund Manager Comment
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Bond & Equity Comment
Global currencies and interest rates
Financial markets have been tremendously volatile over the past week, none more so than fixed income where short-term yields increased sharply, primarily driven by the perceived worries about inflation amongst central banks - especially the Federal Reserve. The US dollar was the best performing currency against this backdrop. Sterling also held up relatively well during the week despite further poor headlines from the financial sector. Higher oil prices have also led to a hawkish response from Asian central banks recently. However, they have been forced to rely on interest rate policy, rather than foreign exchange, since currencies in the region have suffered from the anticipated damage to Asia's external balance from surging energy prices.
American markets
It was another volatile week of trading as concerns alternated from Lehman Bros.' financial position, the Fed's inflation-fighting rhetoric and a welcome pickup in M&A news. The May CPI report showed a 0.6% increase. The core rate, which excludes food and energy, was up 0.2%, which left the year-over-year rate unchanged at 2.3%. This report served as a rallying point on Friday for the stock market. All of the talk earlier in the week from Fed officials had participants on edge that the May numbers might be quite unsettling. With respect to the M&A activity, it was highlighted by InBev's $46 billion cash bid for Anheuser-Busch.
Asian markets
Asia suffered a torrid week, led by domestic Chinese A shares which fell over 15% following government tightening measures. News on the inflation front in China did however improve, with broad inflation dropping to under 8% for the first time in a number of months. This trend should continue with food prices falling throughout China. Elsewhere in the region we saw some profit taking in Japan and inflation concerns in other Asian countries caused renewed selling pressure.
European markets
European markets fell for a second week as investors continue to speculate that bank losses will rise and inflation will force central banks to increase interest rates, worsening the outlook for lenders. On the commodities market oil remained flat on the week at near-record levels and gold fell. Soft commodities rose significantly, led by corn as poor weather in the US threatened supply. Sentiment improved towards week end as consumer confidence reports from the US eased investor concern and eurozone employment figures increased 1.6% to Q1 08. The dollar rose against the euro and weakened against sterling.
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Ashburton Bond & Equity Comment - 10 June 2008
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Thursday, 12 June 2008
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Fund Manager Comment
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Bond and equity comment
Global currencies and interest rates
The FX market was wrong footed by central banks several times this week. The most affected currency was the New Zealand dollar, which experienced a dramatic sell-off following an explicit statement from the Reserve Bank of New Zealand (RBNZ) that it was likely to cut rates later this year. While the RBNZ surprised on the dovish side of expectations, most other central banks took an extremely hawkish line in the face of increasing inflation concerns. The Federal Reserve chairman, Bernanke, made his most explicit expression of concern to date about the impact of high commodity prices and a weak dollar on inflation and inflation expectations. Moreover, ECB President, Trichet, went a step further by signaling that the ECB was much more likely to raise interest rates at its next meeting than markets had previously thought. This led to a significant rally in euro/dollar, which looks likely to continue in the short-term as the exchange rate still appears undervalued relative to interest rate differentials.
Asian markets
Asian markets struggled to make headway this week as worse than expected inflation figures and an exceptionally high oil price led to worries about the prospect of poor policy responses throughout the region. Japan's status as a relative safe-haven translated into further outperformance this week, aided by foreign buying and portfolio repositioning by investors underweight the market. India remains under significant pressure given the short-term catalysts, with every rally being used a profit-taking opportunity.
US markets
A difficult week was seen by the US markets as rising commodity prices and an especially sharp rise in the price of oil was seen. Lehman Brothers were subject to speculation that they were going to raise capital to shore up their balance sheet, although this was denied by the company as they stated that they had adequate reserves. News that the largest bond insurance groups, Ambac and MBIA, had their credit ratings cut to AA was disappointing but seemed to cause little reaction. Economic data was seen as supportive, however Friday's employment report made grim reading as it revealed a jump in unemployment of 0.5% to 5.5%.
European markets
European markets fell this week after the unemployment rate in the US increased more than expected and record high oil prices weighed on earnings forecasts. The ECB and BoE decision to leave key rates unchanged (at 4% and 5% respectively) came as no surprise. Inflationary fears were, however, highlighted and Trichet mentioned a possible rate hike as early as next month. Economic indicators were more positive across the Euro zone, Q1 2008 GDP growth was revised upwards and French unemployment fell. German figures were less positive with factory orders and industrial production both falling in April. The dollar weakened against the euro and gained against the sterling.
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Ashburton Bond & Equity Comment - 30 May 2008
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Tuesday, 3 June 2008
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Fund Manager Comment
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Global currencies and interest rates
Recent weeks have been dominated by commodity price movements and shifts in the primary focus of worry between growth slowing and inflation rising. All of these concerns remain and the oil price in particular grabbed headlines around the world. However, it has traded sideways for the first time for a month and the mild recovery in equities after the falls over the previous week or two was probably a more important driver of currencies. Consistent with that, strongest among the G10 were high-risk currencies from English-speaking nations, led by the Canadian dollar, US dollar and sterling , and the weakest were the traditional funding currencies: the Swiss franc and Japanese yen.
American markets
A welcome dip in oil prices and some decent earnings news defied recession claims that provided the impetus for an advance. Technology stocks lead the charge, along with the industrial, telecom, consumer discretionary and health care sectors also making ground. In other economic news, core-PCE rose 0.1% in April. That left the year-over-year rate unchanged from March, below fed expectations and first quarter GDP was revised upward to 0.9% from 0.6%. These economic releases overall continue to reinforce the view that the economy is weak, but not in recession.
Asian markets
Asian markets fell for the second week following sharp falls in commodity prices that pushed down index heavyweight commodity companies. Japan was, however, one of the few positive performers in the region with the broader Topix Index gaining over 2%. Both foreign and domestic investors have been buying Japan in the hope that the deflationary spiral is finally ending in the country. Japanese government bonds suffered a torrid week on rumours of domestic asset allocation shifts from bonds to equities.
European markets
European markets rose this week after oil dropped (3.1%) and orders for durable goods in the US beat economists forecasts. The falling oil price matched declines in other major commodities (Gold down 3.9%) easing concerns that higher fuel and raw material costs will curb earnings and dampen consumer spending. Airlines, carmakers and retailers rallied on the news. European economic indicators continue to disappoint, German unemployment rose (quarter 1) and the French INSEE business and consumer confidence indices were weaker than expected (May). The Eurozone CPI flash estimate for May was unexpectedly high, as inflationary pressures continue to dominate. The dollar rose against the euro and sterling.
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Ashburton Strategy Note - 29 May 2008
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Friday, 30 May 2008
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Fund Manager Comment
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Strategy Note 29 May 2008
In mid-March, we created a shopping list of developments that we felt would support an upgrade in our ‘cautious optimism’ stance and an increase in our equity weightings. By early May, most of the boxes had been ticked and we duly upped our exposure. Since then, equities have struggled to make further upward progress as the one remaining unchecked box, namely the high oil price, has taken its toll on sentiment.
High food and energy inflation is arguably the biggest cloud hanging over the markets today. It is generating social tensions, sapping consumers’ spending power and is creating considerable uncertainty regarding the outlook for interest rates. It is particularly bad news for Asia, which imports a lot of oil and spends a significant proportion of its income on food. The response of politicians has been predictable but misconceived. If the world is short of commodities today it is largely as a result of government interference. The European Common Agricultural Policy has resulted in farmers dumping excess output on the world market thereby depressing prices and discouraging investment. Similarly, the nationalisation of oil companies has promoted inefficiency and under investment. And yet bizarrely, politicians seem to believe that the answer to the current commodity crisis is more interference rather than less.
Our base case has been that Asia would fight inflation with currency revaluations. With hindsight we should have qualified that position. Asia has proven itself unwilling to revalue its currencies (and thereby threaten the competitiveness of its export) at a time of global economic uncertainty. In the meantime, it has resorted to subsidies and price controls, policies which will do nothing to address the underlying problem (indeed they prevent the price mechanism from working) and are a huge drain on the public purse. Thankfully, there are already signs that the crisis may be close to its low point. Slowly but surely, Asian governments are seeing the error of their ways. What’s more, many commodities are already turning over: wheat is already down over 40% and rice is down 25% despite the environmental disasters in Burma and China. The exponential rise in oil suggests that momentum investors have concentrated their buying power on the one major commodity that remains in an uptrend, but our guess is that trend will also blow itself, albeit at perhaps higher prices. The bottom line is that we see further downside for stocks in the near term, but a peak in the oil price should herald the next up-leg in share prices.
Peter Lucas
Global Investment Strategist
For existing portfolio allocations please see the latest Fact Sheets.
If you wish to view the Investment Strategy on the website, please register online today using the link below:
www.ashburton.com/Online Services
Regards
Louisa Warren
Senior ECommerce Administrator
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Ashburton Bond & Equity Comment - 23 May 2008
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Wednesday, 28 May 2008
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Fund Manager Comment
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Global currencies and interest rates
This week financial markets were dominated by the irrepressible strength of oil prices, both spot and futures prices reached record new highs, and so again the weakest performing currency over the week was the US dollar. The increase in oil and other commodity prices has led to some fairly sharp changes in expected monetary policy around the globe. The focus has been primarily on inflation, strengthened by some fairly robust activity data. These were both seen in the relative strength of the Swiss franc which was buoyed by strong producer prices data and the relatively strong ZEW survey in Germany. However, stronger-than-expected data was not universal: Norwegian GDP was markedly weaker than expected, which contributed to the underperformance of the Norwegian krona despite the higher oil price.
American markets
The US markets have made a good recovery from their lows earlier this year, so there was time for them to take a breather, all the major indices down over 3%. Soaring oil prices have taken most of the blame, but renewed concerns about the state of the financial sector and growing concerns about inflation pressures also played a part. In other economic data, existing home sales in April fell 1.0% which was better than expected. It marked a decline of 3.6% from six months ago. The slowing rate of decline is an important first step in a recovery process. However, the Fed lowered its real GDP growth projection for this year whilst raising its inflation and unemployment rate forecasts at the same time.
Asian markets
Asian markets struggled to make headway this week as negative comments from major financial institutions across the region reignited credit concerns, whilst an extremely high oil price and worrying inflation levels continue to provide significant headwinds and restrict policy flexibility. Every sector barring energy was marked down, with many investors content to use the strong bounce from the March lows to lock-in gains.
European markets
This week was marked by soaring oil prices and a change of tone in central bankers’ speeches, placing inflation concerns above those of economic growth. Markets fell 2.2% (STOXX 600) led by the basic resources sector on speculation that production costs will rise in line with higher energy and raw material prices (oil and gold both posted significant gains over the week). In the Eurozone macro-economic data continues to disappoint. In France, consumer spending on manufactured goods came in below consensus, whilst in Germany investor confidence unexpectedly worsened in May while producer-price inflation in the country accelerated at its fastest pace in almost two years. The dollar weakened against the euro and sterling.
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Ashburton Bond & Equity Comment - 16 May 2008
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Tuesday, 20 May 2008
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Fund Manager Comment
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Global currencies and interest rates
Signs of global stagflation increased this week, but for once the bad news was mainly outside the US. Indeed, somewhat bucking the global trend, US inflation surprised to the downside (slightly). Two economies were particularly in focus this week: the UK and China. China, of course, is far more important in terms of the likely evolution of the global economy and FX markets and commodity prices remain at the core of global inflation concerns. The outlook for the UK economy looks much cloudier and the data was notably weak on the activity front and shockingly strong on the prices front. However, this ugly mix is not unique to the UK and, to a large extent, had already been reflected in the level of sterling that had already fallen sharply over recent months A weak currency and the prospects of higher inflation have led to an upwards revision of interest rate expectations in the UK.
American markets
US equities made solid progress this week as higher commodity prices drove both the basic materials and the energy sector to their highest levels on the year. However, other sectors also advanced with technology supported by analyst upgrades. Investors chose to look beyond short -term bearish factors such as a fall in industrial production and the Fed Chairman’s comments re concern over the financial system. The fiscal stimulus/tax rebate package will now be in consumers’ pockets and this is expected to give a short term fillip to the consumer. If the week’s retail sales are anything to go by, this is already in evidence, as they showed a modest uptick of +0.6% excl. autos and oil. Of some surprise were housing stats which rose and showed some signs of stabilising.
Asian markets
Asian equities advanced on the week, led by Japan as JGB yields continued to rise and investors underweight the market aggressively covered shorts. The technology sector performed particularly well, following better than expected profit guidance from several companies. Elsewhere in the region, metals and mining related stocks led indices higher on increased M&A activity in the sector and as rumours circulated of Chinese interests in BHP. Taiwan continued its recent outperformance on growing optimism over the governing party’s intentions to improve relations with China and KMT President-elect Ma Ying-jeou’s inauguration speech next week.
European markets
It was a week of economic data releases in the Euro-zone with GDP growth stronger than expected in Q1 (+0.7%). Germany and France grew more than forecast, by 1.5% and 0.6% respectively, helping to push DJ EuroStoxx up 1.7% on the week. UK CPI accelerated to 3% on an annual rate and the Bank of England warned that inflation would remain at levels above the 2% target until early 2010. Shipping and commodity stocks were flavour of the week as continued strong demand pushed freight costs for dry bulk commodities (iron ore, coal and grains) to an all-time high. Crude oil also hit a record high of $128 on renewed supply concerns, fears that China would step up fuel consumption after the recent earthquake and very bullish forecasts from Goldman Sachs.
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Ashburton Bond & Equity Comment - 9 May 2008
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Wednesday, 14 May 2008
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Fund Manager Comment
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Global currencies and interest rates
The US dollar rally against G10 currencies lost some momentum during the week with little fundamental news behind the move. The New Zealand dollar was the worst performing currency, this was primarily driven by very weak first quarter labour market data. The Japanese yen and Swiss franc were top of the G10 pile on the back of risk aversion trades during the week.
American markets
For the first time in four weeks the market lost ground. The pullback in many respects was not unexpected. After all, the S&P 500 was up 11% since the Bear Stearns bailout in mid-March. Oil dominated the headlines throughout the week with oil futures closing at new record highs each day. The closing price topped $126.20 per barrel. Economic data was light on the ground, yet the data released provided relatively good news. The ISM Services, first quarter Productivity, Initial Claims and Trade Balance reports were all better than expected. Pending home sales for March fell 1%, which was in line with estimates.
Asian markets
Asian stocks fell this week snapping a two-week rally. The move was led by banks and oil refiners on concern earnings will slow, dampened by record oil prices and a slowing US economy. Financials fell due to weaker than expected first quarter earnings and there were growing concerns that new rules will reveal further credit losses after US regulators told investment banks to disclose capital and liquidity levels. China Petroleum and PetroChina, the region’s largest refiners, retreated sharply on record oil prices as the Chinese government maintains price caps for refined oil products in an attempt to restrain inflation. Automobile companies were also particularly hard hit. Japan’s markets were closed on Monday and Tuesday and made slight losses on the week.
European markets
European markets saw a correction this week falling 1.4% (STOXX), as investors speculated earnings growth won’t be strong enough to extend the two-month rally. Financial companies led the decline after UBS and Swiss Re showed falling profits and lower than expected first quarter results. As widely expected, the ECB and the BoE both left their key rates unchanged at 4% and 5% respectively as soaring food and energy prices hit inflation. The Eurozone PMI services index for April was revised up slightly although economic data released across the region was generally more negative.
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Ashburton Strategy Note - 8 May 2008
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Friday, 9 May 2008
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General Market Analysis
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Ashburton Strategy Notes primarily apply to our Asset Management and Advanced Portfolio Funds excluding Ashburton International Management Funds and Bespoke Portfolios, unless otherwise stated.
They have two roles:
1) to provide more in-depth analysis of portfolio activity; and
2) to provide short-term updates on the thoughts of the Ashburton investment team.
Strategy Note 8 May 2008
In our last Strategy Note (dated March 19) we reaffirmed our ‘cautious optimism’ position on equities, highlighting the short-term positives of extremely negative investor sentiment combined with a traumatic event (Bear Stearns) and aggressive remedial action by the Federal Reserve.
Looking back, we can now see that in fact mid-March was a significant turning point for the markets. The US dollar has recovered, bonds have sold off and equities have enjoyed their best period since the third quarter of last year. The key to these trends has been the Fed shoring up confidence in the banking sector. Earlier this year the banks were caught in a vicious spiral of deteriorating profitability, weaker balance sheets and increasing funding costs. The Fed has broken this cycle, at least for the time being, with the result that bank bond spreads have tightened considerably.
In our last note we identified three developments that would likely trigger an increase in our equity weightings:
· A break in the S&P 500 above its early February highs
· Clear signs of a bottom in the US dollar and at least a short-term top in the oil price
· A break of trend in US 10-year bond yield
In the past few weeks most of these boxed have been ticked: the S&P 500 recently broke temporarily above the February high; bond yields have broken trend and the US dollar is at its highest level for several weeks. The stronger dollar has helped to trigger a correction in selected commodities, which will help to cap inflation pressures and bolster consumers’ spending power. However, there remains one major fly in the ointment: the high oil price.
Commodities are priced in US dollars and hence there is always something of an inverse correlation between the two (a weaker dollar makes commodities more affordable to buyers based outside America and therefore a weak dollar will tend to mean higher commodity prices, all other things remaining equal). However, the relationship between the two has been particularly tight in the past year or so. Indeed, during the past twelve months the correlation coefficient between Brent crude and the euro-dollar exchange rate has been an incredible minus 96% (100% being a perfect correlation). This tight relationship has something to do with investors’ concerns regarding the Fed’s unconventional policy and what it might do to inflation and the dollar.
This relationship also has something to do with the asymmetric impact of rising commodity prices on Central Bank policy. The ECB only cares about inflation. The Fed cares about growth and inflation. The rising oil price made the ECB more concerned about inflation and less likely to cut interest rates. Meanwhile, it made the Fed more concerned about the plight of the consumer and more likely to cut interest rates. Hence, the rising oil price reinforced the divergent trend for European and US interest rates, thereby placing more downward pressure on the dollar. In turn, the weak dollar pushed up the oil price and so on. In other words, it would appear that oil and the dollar have been caught in a vicious spiral that has pushed the dollar down and the oil price up.
Will the dollar’s recent recovery kick-start a virtuous circle of stronger dollar/weaker oil price/rising confidence/rising bond yields/stronger dollar? There’s no sign of it yet, but we still see this as a real possibility. A lower oil price would be very welcome news for the developing uptrend in equity markets and especially so in Asia, the big oil importing region. Watch this space.
As a result of the positive developments listed above, we have increased our exposure to equities (Asset Management and APF Moderate Risk from 33% to 40%, APF High Risk from 53% to 63%) and to the US dollar. We also bought some more yen, bought some Swiss francs (for dollar and euro funds) and (for the Advanced Portfolio Funds) bought the Vix (equity market volatility index); we view all of these trades as being ‘smart’ equity hedges; they have traded contrary to equities in the past, but have a real chance of rising with equities if the environment develops as we expect.
Peter Lucas
Global Investment Strategist
For existing portfolio allocations please see the latest Fact Sheets.
If you wish to view the Investment Strategy on the website, please register online today using the link below:
www.ashburton.com/Online Services
Regards
Chelo Lora
Marketing Administrator
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Ashburton Bond & Equity Comment - 2 May 2008
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Wednesday, 7 May 2008
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Fund Manager Comment
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Global currencies and interest rates
The focus over the past week has been squarely on US economic data and the Fed policy decision. The outcomes were generally positive for the US dollar, and along with the decline in oil prices, led to another strong performance by the greenback against the other G10 currencies. The European currencies, with the exception of the sterling and Norwegian krone, were the worst performing, reflecting the narrowing of the divergence in interest rate expectations relative to the US. The commodity currencies were surprisingly resilient in the face of a broad pullback in commodity prices, potentially because some of them, such as the Australian dollar and New Zealand dollar, were supported by the broader rally in risky assets. The focus over the next week will shift away from the US to other G10 economies. There will be interest rate announcements from the ECB, BoE and RBA - the consensus expects unchanged rates, so the focus will be on any accompanying statements.
American markets
US markets moved ahead this week as news of a further 25% cut in the Fed funds rate to 2.0% was seen, which was largely expected. The FOMC comments that the rate cuts seen will help to promote moderate growth and price stability suggests that the further easing is now less likely. Signs of corporate action also helped as Mars made a US$23 billion offer for Wrigley. Economic news wasn’t all bad, with Q1 GDP up +0.6%, ahead of admittedly low expectations and unemployment falling to 5.0%. Investors are also hoping that the US$150 billion fiscal measures put in place earlier in the year, and reaching individuals in May, will buoy the economy.
Asian markets
Asian equities continued to climb this week following soothing comments from US Secretary Paulson and the Bank of England, that the worst of the credit crisis is over. Financial stocks across the region gained in sympathy, aided by short-covering and repositioning by investors underweight the sector. In Japan, the Nikkei posted another positive weekly performance despite poor macroeconomic data after a positive inflation figure prompted optimism over household consumption spending. Commodity-related names found themselves under further pressure following a correction in gold and precious metals.
European markets
European markets continued to rise for a third week led by energy producers and financials as earnings beat analysts estimates and investor confidence grew after the US Treasury and Bank of England signaled that the worst of the credit turmoil is over. European economic data was less positive with the French household confidence index and the UK’s manufacturing PMI both falling. On the commodities market, crude made its first weekly decline in six weeks and gold continued to fall.
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Ashburton Bond & Equity Comment - 25 Apr 2008
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Wednesday, 30 April 2008
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Fund Manager Comment
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Global Currencies & Interest rates
It was the US dollar's week in the sun as it appreciated markedly against most major currencies, with risky assets generally rallying as well. Continental European currencies were at the bottom of the G10 pile, following a weak IFO business climate survey in Germany - a data release that, in recent months, has made a habit of triggering sharp moves in euro/US dollar. Position liquidation and a move beneath important technical levels seem likely to drive euro/US dollar lower in the very short term.
American
A busy week on the earnings front saw US indices modestly build on last week's gains. Barring the financial sector, results have, in fact, held up remarkably well given the increased evidence of stresses in the US economy. First quarter S&P earnings are expected to show a fall of -13.4%, however, excluding financials have notched up an overall gain of +11% so far. In addition, despite the woes in the credit markets, financial companies are finding it increasingly easy to raise capital to refinance their operations. Bond offerings were seen from Citigroup and Merrill Lynch and investors are increasingly hoping that banks will recover from the billions that have been written off.
Asian Markets
Asian indices posted a positive performance this week, rallying on the back of generally better than expected earnings results across the region. Although the impact of credit-market losses and slowing global growth on corporate profit margins was in evidence, the performance of Asia this year suggest much of the bad news was priced in. In Japan, the Nikkei gained almost 3% led by export-related plays as the yen weakened, whilst China's CSI 300 registered its biggest weekly gain on record after the government cut equity-trading taxes. Financial and technology stocks were amongst the best performers as positive earnings surprises resulted in heavy rotation into these sectors.
European Markets
European markets continued to gain this week after earnings reports, which exceeded expectations, boosted investor confidence and banks rallied on speculation that the worst of the credit crisis is over. Despite market gains, European confidence reports were less than re-assuring. French business confidence continued to decline and the German IFO index (once an exception to the rule) fell sharply, as a surging euro dimmed the growth outlook in both economies and oil prices continued to rise increasing production costs. The dollar rose against the sterling and euro and gold continued to decline.
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Ashburton Bond & Equity Comment - 18 Apr 2008
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Tuesday, 22 April 2008
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Fund Manager Comment
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Global currencies and interest rates
It has been a volatile week in financial markets, with several economic releases and earnings announcements being important drivers. But arguably the most dramatic move was the rally in oil prices to record highs, which was related to other factors - specifically, increasing evidence of a severe tightening of supply conditions in the oil market. Consistent with this move, the best-performing G10 currencies this week included the Canadian dollar and Norwegian kroner. The strength of euro/US dollar has been related to oil prices as well. In seeming defiance of the heightened concerns surrounding FX volatility by the G7 Finance Ministers and Central Bank Governors, euro/US dollar appreciated sharply during the week to within touching distance of the psychologically important 1.60 level.
American equities
The S&P 500 rose 4.3% on the week, which is a bigger gain than it registered for all of 2007. Google played a large role in the NASDAQs outperformance as it soared 20% on Friday after eclipsing the first quarter consensus EPS. This came on the heels of a battery of better than expected earnings reports and outlooks from other tech bellwethers. Inflation at the consumer level was better contained, as seen in the Consumer Price Index, which increased 0.3% in March and just 0.2% excluding food and energy.
Asian equities
Asian markets struggled to make headway once again, as inflation concerns across the region overshadowed sentiment. Although economic data from China and India was encouraging, the likelihood of further tightening measures (the PBOC and RBI raised their reserve and cash requirement ratios respectively) and the introduction of price controls in both economies have created uncertainty and nervousness over the sustainability of corporate profitability. Chinas CSI 300 slumped over 14% as expectations that the government would introduce more market-friendly policies were unfounded, whilst Japan outperformed, helped by a weakening in the yen and a spate of analyst upgrades in blue-chip stocks. Taiwan continued to rally following Tuesdays historic meeting between KMT Vice President-elect Vincent Siew and Hu Jintao.
European equities
European markets bounced back this week gaining 2.8% on some reassuring corporate figures and strong commodity prices. Energy companies rallied hard on record oil prices ($113.38) and the discovery of a potential 33 billion barrel oil field off the Brazilian coast. Encouraging figures emerged from the euro zone, the CPI was revised up in March and Industrial production gained in February. However, German investor confidence unexpectedly retreated in April on concern higher inflation, a stronger euro and fallout from the US housing recession will curb earnings.
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Ashburton Bond & Equity Comment - 11 Apr 2008
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Tuesday, 15 April 2008
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Fund Manager Comment
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Global currencies and interest rates
To some extent, it has been a strange week in the G10 FX markets. The best performing currencies overall were the New Zealand dollar, Australian dollar and Norwegian krone, spurred by gains in commodity prices. The worst performing currency was the Canadian dollar, despite the oil price rising above 100 US$/bl. The euro was only in the middle of the G10 pack in terms of performance and yet, much of the focus was on euro strength as it reached a new all time high against the US dollar and broke through the 0.80 level against the sterling. Later in the week we saw renewed appreciation by the Japanese yen and a general increase in implied volatilities. Overall, moves were consistent with an uptick in nervousness with no very obvious driver, centered on the US and UK economies.
American equities
The stock market's manic nature was on display again this week, as the major indices slipped appreciably in the wake of some familiar concerns, particularly surrounding the specter of further write-downs in the financial sector, rising inflation and deteriorating profit prospects. GE reported a 12% decline in continuing earnings and an 8% decline in earnings per share. The news riled the markets, not only because this rock-steady company missed, but also because it missed by such a big margin. On the flip side, Wal-Mart raised its first quarter EPS guidance.
Asian equities
Asian markets consolidated the previous fortnight’s gains as extreme volatility and heavy stock rotation continued across the region. Volumes remain light, with investors unwilling to commit aggressively in the midst of corporate earning’s season. Companies missing expectations are being severely punished, with many forced to temper guidance in light of slowing global growth. Domestic economic news was generally light, although India came under further pressure after a high inflation figure triggered responses from the government in the form of price controls. Commodity related names were back in vogue after investors viewed the recent sell-off as overdone.
European equities
European markets suffered a sharp turnaround this week declining 2.8% (STOXX 600) after posting two weeks of convincing gains. Declines were led by financial companies and retailers on speculation that an economic slowdown, widening credit loses and soaring commodity prices will curb earnings (crude oil and gold both gained on the week). The markets were further stressed by Jean-Claude Trichet’s announcement that inflation risks are elevated and credit turmoil may affect economic growth more than expected. More positive news stemmed from France and Germany, where industrial production and manufacturing output continued to rise in February. The strengthening of the euro against the US dollar was also a welcomed change.
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Ashburton Bond & Equity Comment - 4 Apr 2008
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Tuesday, 8 April 2008
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Fund Manager Comment
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Global Currencies & Interest rates
Despite further worrying economic news this week, such as the US employment report, equity and credit markets have continued to recover from their recent lows. This recovery appears to have been driven primarily by reduced concerns surrounding the outlook for the financial sector. Central bank measures have made acute liquidity shortages, such as those faced by Bear Stearns, less likely in the future. There is also optimism that banks and brokers, by being more aggressive with writedowns, are reducing the uncertainty surrounding the banking sector and are still able to raise capital. Against this relatively calm backdrop in financial markets, the Japanese yen and Swiss franc have been amongst the worst performing currencies, while commodity currencies have outperformed even though commodity prices themselves have not moved much. Asian currencies also continued to grind higher against the US dollar over the past week, as central banks tolerate foreign exchange appreciation to help curb inflation.
Asian equities
For the first time this year, Asian stocks managed a back-to-back weekly gain. Stock markets across the region moved higher, with particular gains seen in Hong Kong. Financials led the charge higher on global hopes of an easing in the credit crisis and the technology sector also gained strongly on hopes of improved pricing power. India was one of the few markets underperforming over worries about rising inflation and anticipated government action to cool it down.
American equities
The S&P 500 rallied just over 4.0% for the week, it was the financial sector that led the charge, gaining 6.6%. Fed Chairman Bernanke told the Joint Economic Committee in his testimony on the economic outlook that he thought real GDP wouldn't grow much, if at all, and could even contract slightly in the first half of 2008. That headline caused a stir but the market took it in stride. Weekly initial claims rose 38K to 407K, well above the market's expectation of 365K. Meanwhile, the Dept. of Labor revealed on Friday (4th) that non-farm payrolls declined 80K in March (consensus -50K) and that the unemployment rate jumped to 5.1% from 4.8%.The market took a requisite dip following both of the aforementioned reports but again soon rebounded in keeping with the week's bullish bias.
European Equities
European markets gained strongly for a second week, posting their biggest weekly gain in a year. The move was led by financial stocks as UBS and Lehman Brothers revealed plans to raise capital, improving sentiment upon speculation that banks will recover from mortgage-related losses. On the commodities market, oil made slight gains whilst gold softened. The euro zone released encouraging figures, with the consumer price index rising 3.5% year-on-year and German unemployment for March declining.
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Ashburton Bond & Equity Comment - 28 Mar 2008
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Tuesday, 1 April 2008
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Fund Manager Comment
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Global Currencies & Interest rates
The stress in markets has been exacerbated of late by the events surrounding Bear Stearns, leading to extreme illiquidity and general withdrawal from counterparty risk. The US dollar has been very volatile over the past few weeks. While it appreciated strongly following the Fed measures, more weak US economic data has led to renewed weakness, particularly against the euro, which has been helped by another surprisingly strong IFO business climate survey in Germany. The Swiss franc has been the best performing G10 currency this year on the back of heightened risk aversion trades.
Asian equities
Asian markets posted their biggest weekly gains of 2008, with all markets rising except mainland China and Vietnam. Commodity stocks rebounded following the heavy sell-off last week and although domestic Chinese stocks fell, the Hong Kong listed China universe rebounded very strongly, following good results from the likes of China Mobile.
American equities
The week began on an upbeat note but then it was pretty much all downhill from there. JPMorgan Chase agreed to raise its buyout bid for the embattled firm to $10 per share from $2 per share. Stocks also rallied on better than expected earnings reports from Tiffany and Walgreens. First quarter earnings estimates are getting slashed for a number of banks and brokerages on continued write-down fears, oil prices topping $107 per barrel, the inventory of new homes remaining unchanged in February at 9.8 months despite a 2.7% decline in median prices. However the core-PCE price index provided some good news from an inflation standpoint as it held steady at a year-over-year rate of 2.0%
European Equities
European Markets had a strong week, finishing 3.3% higher, following reassurance from various central banks that money markets would be supported. Industrial Metals were particularly strong (+8.1%), as rumours of further consolidation drove stocks higher. It also became evident that price hikes in steel were ‘sticking’. The German IFO survey also helped markets as it rallied to a seven month high.
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Ashburton Strategy Note - 20 March 2008
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Wednesday, 26 March 2008
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General Market Analysis
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Ashburton Strategy Notes primarily apply to our Asset Management and Advanced Portfolio Funds excluding Ashburton International Management Funds and Bespoke Portfolios, unless otherwise stated.
They have two roles:
1) to provide more in-depth analysis of portfolio activity; and
2) to provide short-term updates on the thoughts of the Ashburton investment team.
Strategy Note 20 March 2008
The unrelenting flow of bad news continues, particularly in America where the number five investment bank, Bear Stearns, pretty much collapsed in a heap. Meanwhile, the Fed continues its fight to restore confidence and liquidity to the markets. It has broadened the range of institutions to which it is willing to lend, as well as the range of collateral that they will accept and the term for which the money can be borrowed. What's more they have reduced interest rates further: the discount rate (at which they lend to banks) by a cumulative 1.00% to 2.50% and the Fed Funds rate (at which banks lend to each other) by 0.75% to 2.25%. No one could accuse the Fed of being asleep at the wheel.
Despite all the bad news we remain comfortable with our 'cautious optimism' position.
We are encouraged by Wall Street's resilience in the face of all this bad news. Indeed, we are mindful of the fact that major market bottoms are often accompanied by really nasty developments like the collapse of Bear Stearns.
We are impressed by the Fed's apparent determination to do whatever is necessary to bring this crisis to an end. If recent measures do not work they still have the ultimate weapon of buying loans from the banks. It remains to be seen whether these policies will have inflationary consequences in the long-term, but either way, in the medium term they should successfully bring about a return of risk appetite and an end to the current liquidity crisis. In other words, we expect markets to recover in the next year or so, but the longer-term outlook may be less rosy.
Markets tend to turn when everyone is negative. In late January when investor sentiment fell to its lowest level since 2003, we got a 10% rally that lasted two weeks. Markets have since relapsed back, the lows and sentiment have become even gloomier. Indeed, sentiment is now pretty much as negative as it was at the 2003 low in stockmarkets. This would suggest that a more meaningful bounce may be close at hand.
Tuesdays (18th March) sharp move up saw the S&P 500 break its short-term downtrend, which is an encouraging development. But one swallow does not make a summer. For us to consider an increase in our overall equity weighting, we would like to see the following happen:
The S&P 500 break above its early February highs (roughly 5% above current levels)
Clear signs of a bottom in the US dollar and at least a short-term top in the oil price
A break of trend in US 10-year bond yield. This would mean yields rising from their current level of 3.42% to above 3.80% and beyond.
Geographically, we still favour those markets that benefit most directly from lower US interest rates, i.e. Wall Street and Asia ex-Japan. The former is already outperforming; the latter has struggled recently as oil has soared and risk appetite has evaporated. However, if Wall Street continues to recover, the likelihood is that Asia ex-Japan will perform very strongly.
Peter Lucas
Global Investment Strategist
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Louisa Warren
Senior ECommerce Administrator
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Ashburton Bond & Equity Comment - 14 Mar 2008
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Tuesday, 18 March 2008
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Fund Manager Comment
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Global Currencies & Bonds
In a volatile week for markets, the focus was on renewed efforts by central banks to inject liquidity into the financial system. The knee-jerk reaction was a rally of the US dollar and the carry crosses. The strength of the US dollar was related to the perception that the liquidity measures made very aggressive interest rate cuts by the Fed less likely in the short term, while the appreciation of the carry crosses was consistent with the general rally in risky assets in response to the liquidity measures. But these moves reversed quickly as investors took the view that the coordinated measures, while alleviating liquidity issues, did not directly solve the underlying problems in the credit market. The Japanese yen has since appreciated sharply against most currencies, while the US dollar has been the worst-performing currency. These moves led US dollar/Japanese yen to briefly move below the psychologically important 100 level for the first time since 1995.
American Markets
It was a volatile week of trading, with the US markets ending roughly where they started. The big story of the week was the rumors that Bear Stearns was facing a liquidity crisis. This culminated with a rescue package being brought together over the weekend for a buyout by JP Morgan at $2 per share, a fraction of its closing price. The managed healthcare group saw a massive 18.7% decline. Both WellPoint and Humana cut their earnings guidance well below expectations. On a brighter note, an inflation reading was better than expected. February core CPI was up 2.3% year-over-year, lower that expected. Next week, Tuesday’s Federal Open Market Committee announcement will be the main focus.
European Markets
European markets fell for a third week as concerns mounted that the US is slipping into a recession. Shares in Bear Stearns collapsed (-57% on the week) and financial stocks plummeted. Concerted action by central banks to enhance liquidity in the money markets failed to revitalise sentiment. The dollar continued its slide lower leading to a strong commodity market with crude and gold reaching new highs. In Germany the trade surplus widened to EUR 17.1bn and the ZEW increased to -32 in January.
Asian Markets
Asian markets tumbled as indiscriminate selling ensued across the region amid extremely volatile conditions. Fears that the US Federal Reserve may now be panicking in a bid to stabilise the American economy have led to high levels of nervousness, whilst reassurances over the structured finance issue have largely been ignored. In Japan, export-related names were hardest hit, as the yen punched through the psychologically important 100 level (vs. the dollar) whilst Chinese inflation numbers were higher than expected, dampening sentiment and reigniting concerns over the possibility of further tightening measures. Commodity-related stocks largely outperformed as the yellow metal breached $1000, whilst crude traded above $110 on continued supply disruptions.
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Ashburton Bond & Equity Comment - 7 Mar 2008
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Tuesday, 11 March 2008
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Fund Manager Comment
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Global Currencies & Bonds
Equity markets saw a renewed bout of weakness last week, with a poor technical close in the S&P 500 index warning of worse things ahead. Within the foreign exchange sphere, the Japanese yen and Swiss franc were the best performing currencies, with both touching fresh highs against the US dollar, while the high-yielding currencies such as the Australian dollar and New Zealand dollar underperformed. Heightened risk aversion was not confined to these markets, with credit and swap spreads widening to record levels also.
American Markets
Another difficult week for the US markets, capped on Friday by further evidence of the slowing US economy, as a weaker employment report confirmed investors worst fears. This was the largest jobless fall since 2003 and combined with fears of an imminent bankruptcy by a mortgage group led to a severe case of nausea amongst market participants. The bond insurance group Ambac, as part of an effort to alleviate the risk of a credit downgrade, raised US$1.5bn in capital. However this was also poorly received, being significantly less than hoped for to shore up the group’s rating. All the while, with the US dollar weakening on hopes of an early interest rate cut, energy prices continued to rise.
European Markets
European markets fell sharply for a second week, on concern credit-market losses will widen at financial companies and record commodity prices will increase production costs as oil and gold posted new highs. Speculation of a US recession remains the underlying influence on market confidence, despite more positive economic data emerging from Europe, as German industrial output for February climbed 1.8% and the ILO unemployment rate for France reached 7.8%, its lowest since 1983. The dollar continued to slide against both the euro and sterling.
Asian Markets
Asian indices tumbled to their worst weekly performance in months as a raft of poor economic data from America suggested a prolonged recession in the world’s largest economy. Bears have taken firm control of the markets, with any short-term rallies being used as selling opportunities. Sentiment remains at extremely bearish levels with investors unwilling to commit aggressively given the volatile conditions, evidenced by a lack of market leadership and heavy stock rotation.
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Ashburton Strategy Note - 3 March 2008
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Monday, 10 March 2008
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General Market Analysis
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Strategy Note - 03 March 2008
Some weeks have passed since our last Strategy Note and we thought it was about time that we brought things up to date. In late January, we said that equity markets would remain trapped in a volatile range for the time being, with the downside protected by attractive valuations and Fed easing and the upside constrained by the need for further remedial action by policy makers around the world (the inverse applies to government bonds). Indeed, we said that the markets would play a crucial role in terms of keeping their collective eye focussed firmly on the ball and so it has transpired. The equity markets have celebrated every positive step and punished every setback. If the authorities were in any doubt as to what was at stake with the 'credit crunch', they aren't now.
The currency markets have been particularly interesting in this regard: Although the Federal Reserve has been happy to slash interest rates in response to the 'credit crunch,' other Central Banks have been reluctant to follow suit. As a result, the US dollar has weakened again, therefore placing greater pressure on the likes of the ECB to think again. This currency volatility is an added source of uncertainty for the markets in the short-term (particularly in Europe and Japan) but it will be good news in the long run, if it results in a more co-ordinated attempt to stem the crisis.
Interestingly, commodity prices have recently been very strong. In fact, today's FT states that commodities have seen the "biggest monthly gains in February since the oil crisis of the 70's and have enjoyed their strongest start to any year for half a century." Does this indicate that the Fed has gone soft on inflation or merely that the Asian development story continues, despite the travails of the US consumer? At this early stage we prefer the latter interpretation but either way, our equity managers are positioned to benefit from this trend. Incidentally, they are still very light in financial stocks, as they have been through much of this crisis.
As far as top-down strategy is concerned, we continue to maintain a cautious stance on equities, with particular emphasis on America and Asia ex-Japan, which benefit fairly directly from Fed easing. On the currency front, our main positions are in the yen, euro and Swiss franc, which are benefiting from lower US interest rates and/or the global 'flight to safety' flows. The fixed income weighting is invested exclusively in Australia and New Zealand (currency hedged), the only developed world bond markets to offer attractive real yields by historical standards. Most of the bonds held are relatively short-dated but we feel that an opportunity to switch longer (and thereby take a more aggressive position) in those markets may be at hand.
In summary, the message of our January Strategy Note continues to apply. Investors should not be unduly alarmed by the bad economic news now hitting the headlines. The markets are discounting mechanisms, anticipating developments six to 12 months ahead of the game. The markets fell last year in anticipation of what is happening now. Meanwhile, the authorities are being prodded in the right direction on policy and the China development story continues unabated. What is more, equity markets are attractively priced and our feeling is that the next major move will be up. Some patience may be called for, but it will be worth the wait.
Peter Lucas
Global Investment Strategist
03 March 2008
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Ashburton Bond & Equity Comment - 29 Feb 2008
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Thursday, 6 March 2008
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Fund Manager Comment
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Global Currencies & Bonds
The overriding theme of FX markets over the past week has been US dollar weakness once again, highlighted by euro/US dollar reaching an all-time high on Friday at 1.5239. Despite a stronger than expected IFO release last week. This has clearly been a US dollar story - the euro was in the middle of the G10 pack and the largest gainer against the US dollar over the week was the Swiss franc, closely followed by the Japanese yen.
American Equities
The US market ended what had been a fairly benign week on a sour note and closed sharply lower on Friday. This also closed February with yet another monthly fall, making it four months of falls in succession. Further downgrades to the financial sector were seen as analysts predicted yet more losses in the credit markets. Consumer confidence, new home sales and durable goods orders all saw weaker numbers, although personal income and spending held up. Whilst having little impact, of some reassurance to investors was the Fed Chairmans pledge to boost growth, and cut rates as necessary to prevent a recession.
Asian equities
Asian markets once again played hostage to events in the US, as hopes of bail-outs of US bond insurers prompted a rise in most Asian indices. Hong Kong led the pack higher, as HSBC gained whilst the rise in oil prices helped the Chinese oil names. Commodities generally had a good week, with both base and precious metals moving sharply higher.
European Equities
European markets fell slightly over the week sending the Stoxx 600 into its fourth straight monthly decline on mounting concern the US economy is slipping into a recession and that financial companies will report further write-downs. On the commodities market, sugar, cotton and gold gained and crude oil posted record highs as a weakening US dollar prompted funds to seek a hedge against further declines. The euro and sterling made significant gains against the dollar putting pressure on exports to the US. In France, the INSEE consumer confidence index was down 1 point at -35, the euro zone headline CPI for January accelerated slightly (+3.2%) but the core index slowed (+1.7%).
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Ashburton Bond & Equity Comment - 22 Feb 2008
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Tuesday, 26 February 2008
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Fund Manager Comment
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Global Currencies & Bonds
US economic prospects remain a key driver of the FX market, underlined this week by the sell-off in the US dollar and carry crosses following weak survey data from the US manufacturing sector. The New Zealand dollar was the G-10 winner over the week closely followed by the Swiss franc.
American Equities
The US markets closed in a mixed fashion on the back of rising commodity prices, a jump in consumer inflation, cautious earnings guidance from retailers Wal-Mart, a weak regional manufacturing report and new economic projections for 2008 from the Federal Reserve, which included a downward revision to the GDP growth forecast and upward revisions to the inflation. Fortunately, it wasn't all negative, Hewlett-Packard had a great quarterly report with better than expected fiscal year guidance. The markets picked up in the last 45 minutes of trading on Friday, after news that a bail-out plan for bond insurer Ambac Financial that would enable it to retain its triple A rating could be announced as early as Monday or Tuesday.
European Equities
European markets gained for a second week led by souring commodity prices as gold posted new highs and crude surpassed $100 per barrel once more. Growth was supported by increased optimism that demand from emerging markets will counter an economic slowdown in the US and financials gained on better than expected forecasts.
Asian equities
Asia struggled to make any headway this week as more sluggish economic data from the US overshadowed efforts to resolve the structured finance crisis. Volatile market conditions and worries that the worst is still not over for the worlds largest economy are keeping many investors on the sidelines and any rallies are being used as selling opportunities. Almost every sector was marked down, with export-related counters particularly vulnerable on concerns of a slowing American consumer. Taiwan was the standout market, gaining on expectations of a KMT party victory in next months elections that may lead to improving relations with China.
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Ashburton Bond & Equity Comment - 8 Feb 2008
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Wednesday, 13 February 2008
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Fund Manager Comment
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Global Currencies & Bonds
The USD rebounded sharply this week as the market shifted its attention from Fed policy to the ECB and BoE rate decisions. Even though the outcomes of the two rate decisions were in line with expectations (the BoE cut 25bps while the ECB left rates on hold), the market's immediate reaction was to sell both euro and sterling. With the equity market sell-off resuming this week, it was not surprising that several cyclical commodity currencies (South African rand, Norwegian krona, Canadian dollar) lost ground. The exceptions were the Australian dollar and New Zealand dollar which outperformed most of the other high yielders. The Australian dollar was bolstered by the RBA's rate hike, while the New Zealand dollar thrived on the continuing rally in the agricultural complex and strong domestic data.
American Equities
The major indices suffered sharp losses and essentially gave back the prior week's gains. The Institute for Supply Management's business activity index showed a stunning drop to 41.9 from 54.4 in December which caused some heavy selling. The negativity persisted when technology bellwether Cisco said it experienced a slower order growth rate in January than the preceding months and warned its fiscal third quarter revenue growth would be below expectations. Oil prices ended the week 3.0% higher tied to reports OPEC might cut output.
Asian Equities
Asian equity markets continued to plunge in a shortened holiday week, as further disappointing data from the US suggested that the worst is not yet over for the worlds largest economy. With most of the markets closed, there was little in the way of region specific news to provide underlying equity support, and investors remain cautious on further worries over corporate earnings disappointments. All 10 sectors were marked down, with export-related stocks especially vulnerable.
European Equities
European stocks declined sharply losing 4% over the week after a US service-industries report strengthened speculation that the Worlds largest economy is in a recession. The Bank of England cut its interest rate to 5.25% in response to slower consumer spending and declining house prices whilst ECB President Trichet kept base rates unchanged but signaled the risk to the regions economic growth is increasing, suggesting probable cuts in the foreseeable future. The automobile and financial sectors were hit particularly hard by recent economic uncertainty whilst a shift in the Baltic Freight Index index confirmed a turnaround previously seen in maritime transportation. Over the week we saw Ocean Rig break the record for the highest rig rate paid (for an advanced floating rig) at $635k per day.
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Ashburton Bond & Equity Comment - 1 Feb 2008
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Wednesday, 6 February 2008
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Fund Manager Comment
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Global Currencies & Bonds
The Federal Reserve delivered what was expected; it cut the fed funds and discount rates by a further 50bp. The dollar remained relatively flat over the week whilst sterling was the biggest G10 loser. It is now widely discounted that the Bank of England will follow suit this month and cut UK interest rates to stimulate growth. The New Zealand dollar and Australian dollar were the top two performing G10 currencies respectively, both buoyed by their continued high interest rate levels.
American equities
Roughly 20% of the S&P 500 reported their quarterly earnings results in the past week, yet that cascade of results seemed insignificant at times to other developments that included the FOMC meeting, manic reports about bond insurers' credit ratings, January employment data, and a blockbuster announcement from Microsoft that it was offering $31 per share, or nearly $45 billion, to acquire Yahoo. In other economic news, durable goods orders rose 5.2% and the manufacturing sector's ISM Index jumped to 50.7 (a number above 50 reflects growth).
Asian equities
Asian stocks continued to fall on concerns domestic demand within the region will not be strong enough to offset a US recession. Despite offering excellent selective buying opportunities, sentiment in Japan plunged to all-time lows and the market in general remains a value-trap. The disclosure of greater than expected sub-prime exposure from the banks exacerbated the sell-off. Elsewhere in the region, extreme weather conditions in China ground transport links to a halt and destroyed millions of acres of crops. Given already choppy market environment, expectations that this will slow growth whilst stoking inflation forced many investors to the exit.
European Equities
This was the first weekly positive return out of the last five with the Eurofirst 300 Index finishing up 1.77%. The continued doom and gloom in the financial sector was offset by renewed merger and acquisition activity in the mining and metal sector as news that Chinalco and Alcoa had teamed up to buy a 12% stake in Rio Tinto. Severe winter weather in China together with massive power shortages in South Africa causing disruption to mining has also helped buoy base metal prices. After a further 50bp interest rate cut by the Federal Reserve, all eyes will be on the Bank of England’s interest rate decision this week.
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Ashburton Bond & Equity Comment - 25 January 2008
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Tuesday, 29 January 2008
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Fund Manager Comment
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Global currencies and interest rates
It was an eventful and volatile week for financial markets. The biggest story was the surprise inter-meeting rate cut of 75 bps by the Federal Reserve which was the largest single rate cut since the 1980s. However, the actual price changes in the FX and bond markets have been surprisingly small, albeit with very high levels of intra-day volatility. The simultaneous appreciation of both cyclical and funding currencies reflects the considerable degree of uncertainty prevalent in the market.
US Markets
U.S. stocks started the shortened week sharply lower, following a sharp sell-off in global equity markets due to growing concerns about declining corporate profits and the overall health of the economy. Before the start of trading on Tuesday, the Federal Reserve cut its benchmark interest rate by 75 basis points to 3.5% to help support the troubled financial sector and stabilize the economy. The move, which came before the central bank's formal meeting next week and marked the largest cut in the federal funds rate in more than twenty years, helped prevent a larger drop in U.S. equity prices. Stocks managed to extend their gains on Thursday after new jobless claims data showed that businesses are not entering into recessionary mode. Meanwhile, news of a bi-partisan fiscal stimulus package being agreed to was viewed in a favourable manner, even though it was criticised just a few days earlier.
Asian Markets
For the fourth week running Asian stocks dipped in extremely volatile trading over slowing global growth concerns. The early part of the week saw some of the largest moves to the downside in many years, before the surprise Fed cut led to a sharp revival into the weekend.
European Equities
European stocks experienced a highly volatile week recovering from early losses as the US Fed surprised markets by cutting key rates by 75bp. Concerns over the health of US bond insurers and news that a rogue trader at Societe Generale had caused the biggest fraud in investment banking history (5bn) prompted a further sell-off. Eurozone PMI manufacturing and services confirmed a slowdown for January whilst French consumer spending showed a technical rebound in December. Strong corporate results helped buoy equities towards the end of the week.
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Ashburton Bond & Equity Comment - 11 January 2008
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Tuesday, 15 January 2008
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Fund Manager Comment
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Global currencies and interest rates
The key feature of an otherwise quiet week in the bond and currency markets was another drop in the value of sterling. The pound, which is now down over 10% from its January 2007 peak on a trade-weighted basis, drew no comfort from the MPCs decision to leave interest rates unchanged. This was due in part to the fact that the ECB (who also decided to leave interest where they were) was rather more vocal about the upside risks to inflation.
US Markets
The major averages finished lower in the past week, with the stock market still trying to find its footing amid ongoing credit market troubles. Investors moved into more defensive areas that are more resistant to an economic downturn, such as Consumer Staples and Health Care. However, new claims for unemployment for the week ending January. 5 fell to 322,000 from 337,000 the previous week. That level still shows no signs of companies moving into recession mode. Alcoa reported stronger than expected earnings after the close Wednesday, officially kicking off the fourth quarter earning season.
Asian Markets
In a continuation of the recent trend, global growth worries due to the slowdown in the US spread to Asia again, pushing stocks to a three month low. Japan was particularly hard hit, falling to levels last seen in November 2005 on concerns of the impact to exports from slower growth and a rising yen. Indias Sensex closed marginally higher, but the star performer was Malaysia where stocks rallied strongly on election expectations and heavy foreign and domestic buying.
European Equities
European stocks continued to fall for a second week increasing the total years loss to 5% amidst continued concern that credit-market losses and an economic slowdown will dampen profit growth. Decisions by the BoE and ECB to leave benchmark rates unchanged did little to alleviate poor sentiment, suggesting a higher focus on the threat from rising inflation than the risk of slowing growth. Retail companies also struggled on the week being driven lower by weakening consumer confidence, higher commodity prices and poor sales figures. The euro remained stable relative to the dollar.
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Ashburton Bond & Equity Comment - 4 January 2008
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Tuesday, 8 January 2008
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Fund Manager Comment
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Global currencies and interest rates
The bond and currency markets were dominated this week by weaker than expected US economic data and a lurch lower in share prices. Bond yields fell, most particularly in America, as expectations grew that the Federal Reserve would reduce interest rates as much as 0.5% at their next meeting later this month. The yen was strong as market volatility caused investors to close out their ‘carry trades’. Conversely sterling was relatively weak, as investors continued to focus on the deteriorating prospects for the UK economy.
US Markets
Stocks began the week on shaky ground, trading lower on Monday, the last day of 2007, amid ongoing concerns about the fallout in the housing and credit markets. According to the Institute for Supply Management, national manufacturing activity shrank unexpectedly in December, fuelling concerns about the spill over effect of the sub-prime crisis leading to an economic recession. The ISM Index fell to 47.7 from 50.8 in November - a reading below 50 indicates a contraction in manufacturing activity. The Labor Department.'s much anticipated employment report on Friday showed weaker than expected job growth and a rise in the unemployment rate. Unemployment increased to 5% last month from 4.7% in November. While 5% unemployment is still considered good, the increase from the prior month was discouraging for some investors as it fed concerns about the economy possibly slipping into a consumer-led recession.
Asian Markets
Asian stocks fell on the week after economic reports across the region suggested that a US slowdown is having a greater than anticipated effect on global growth. Singapore’s fourth quarter GDP growth was weaker than expected. South Korean estimates for 2008 were lowered after a disappointing December and Japan’s Topix responded to dismal US car sales data with its worst ever start to a year, falling 4.3%. Pakistan slumped after the murder of Benazir Bhutto sparked rioting across the nation, although India’s out-performance continued on the back of its strong domestic-demand related story.
European Equities
European stocks tumbled this week on poor US economic figures and by a worse than expected forecast from DSG International, the leading UK electronics retailer. Next also reported disappointing sales figures. Italy’s manufacturing PMI fell 0.6 to a recession-skirting 50.7. French consumer confidence fell to a 1.5 year low. There was better news in the UK money markets where overnight interest fell to 5.60% from 5.84%. Agricultural issues were well supported whilst the price of Brent crude surged by a further 3.3% breaking the symbolic US$100 ceiling in trading, the price of gold also increased.
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Ashburton Bond & Equity Comment - 21 Dec 2007
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Thursday, 27 December 2007
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Fund Manager Comment
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Global currencies and interest rates
Sterling weakness dominated the foreign exchange headlines last week; the combination of the slowdown in UK housing, Bank of Englands rate cut earlier this month, dovish BoE minutes along with the current account deficit widening to £20bn in third quarter, all took their toll on the currency. Cable fell four “big” figures from the 2.02 level to 1.98 in just a few days and the technical picture looks increasingly bearish for the sterling versus the other major currencies. The commodity and higher yielding currencies (New Zealand dollar, Australian dollar and Canadian dollar) were the biggest gainers over the week and were helped by lower volatility levels (the VIX Index fell from 24% to 20%). Moreover the Canadian Dollar resumed its bull-trend which has been in place since the start of this year and moved back below parity once again versus the us dollar.
US Markets
Against a backdrop of troubles for the financial sector and concerns over the US economy, the markets rose from an early sell-off to close the week higher. November’s consumer spending data was surprisingly strong and came as a pleasant surprise to investors who fear that with ever higher oil prices and the slump in housing (new housing starts fell 3.7% in November), the US economy may already be in recession. Other data revealed that a Philadelphia Fed survey of regional business activity actually fell, whilst new unemployment claims rose slightly. Energy shares were strong followed by technology bolstered by positive reports from Oracle and Research in Motion, whilst the impact from the housing slump was clearly in evidence with Bear Stearns and Morgan Stanley reporting their first ever quarterly losses.
Asian Markets
Asian stocks fell for a second week led by exporters and financial firms, on concern US sub-prime mortgage losses will spread, dampening growth in the regions largest export market. The MSCI Asia Pacific Index declined 2.1% this week, chipping away at the measures annual performance, currently set to make its smallest annual gain in five years. Lee Myung-bak (Grand National Party) will succeed Roh Moo-Hyun as the president of South Korea. He has stated that he wants to restore relationships with the US for a greater emphasis on free market solutions.
European Equities
European markets fell over the week as continued fears over credit market health weighed on financial stocks and spilled over into the construction sector. The ECB has injected EUR348.6bn at a minimum rate of 4.21% into the interbank market in an attempt to alleviate tensions. Sterling slid to a four month low against the dollar and record low against the euro, as subdued economic data supported expectations that interest rates were heading lower in 2008. The IFO index of German Business confidence continued to fall and the Bundesbank cut its 2008 growth forecast to 1.6%, further suggesting that the eurozone economy is set to weaken.
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Ashburton Bond & Equity Comment - 7 Dec 2007
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Tuesday, 11 December 2007
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Fund Manager Comment
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Global currencies and interest rates
The main focus last week was on the likely action of Central Banks in Europe and America. As expected the Bank of England cut interest rates by 25 bps to 5.5% and further cuts are now expected in the New Year, given slowing economic growth and the downward trend in house prices. This resulted in sterling coming under continued pressure. A surprise cut in Canadian interest rates initially saw a sharp sell-off in the Canadian dollar but this proved to be short lived. Elsewhere, the ECB did not surprise the market by leaving interest rates unchanged and its warning of strong upward pressure on inflation provided further support for the euro. The increased odds of an aggressive 50bps cut by the Federal Reserve on 11th December were reduced sharply after better US employment data. A 25bps reduction is now the most likely outcome.
American Equities
Despite ongoing problems in the housing and credit markets, and mounting concerns about the overall health of the economy, the stock market endured another turbulent week to finish sharply higher. The Institute for Supply Management's index showed stable manufacturing conditions with a level of 50.8 for November, compared to 50.9 in October. A reading above 50 is intended to reflect growth. In other economic news, non-farm productivity rose 6.3% in the third quarter, up from a preliminary estimate of 4.9% and unit labour costs fell 2%, well below the earlier reading of a 0.2% decline, reflecting lower inflationary pressures.
Asian Equities
Asian stocks rose for a second week, led by financial companies and exporters after the US government announced a plan to limit defaults on sub-prime mortgages, easing concern the region’s largest export market will suffer a recession. The MSCI Asia Pacific index added 1.6% and other benchmarks advanced across the region except in Sri Lanka
European Equities
European equity prices rose 0.7%, rebounding from their worst month in over a year as policy makers and politicians in the US and UK took steps to contain the credit market turmoil. In the UK, the Bank of England cut the base rate by 25bp stating tightening credit conditions were the main threat to growth. Sterling fell 3.3% against the dollar after reports showed housing prices declined in November and consumer confidence slumped.
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Ashburton Bond & Equity Comment - 30 Nov 07
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Tuesday, 4 December 2007
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Fund Manager Comment
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Global currencies and interest rates
Markets continued their roller-coaster ride last week. Optimism was more apparent and equity prices rose and the currencies that typically do well when risk gets put back on were the strongest performers: the NZD, AUD and GBP. However, there has been no improvement within the global money markets and there is still a huge shortage of liquidity. The US 3-month T-bill rate has fallen further to just below 3% (lower than what was seen during August), whilst LIBOR rates have again jumped higher both of which has put increasing pressure on the Fed. If credit market conditions do not improve over the next 10 days, there will be significant pressure on policy makers to be aggressive and there is a good chance we may see the Fed cut the fed funds rate by 50bps in December rather than the widely discounted 25bps.
American Equities
With increasing hopes of an imminent interest rate cut the US markets steadied themselves after an initial sell off and ended the week strongly. Financial stocks have remained in the spotlight and a number of the US mortgage groups and homebuilders made double digit gains as the Federal Reserve Chairman signaled he might cut rates to prevent housing foreclosures and further pain to the American household. A concerted approach to prevent further turmoil and credit constraints through freezing payments on adjustable rate mortgages has been proposed and has initially been welcomed, particularly as government reports suggest that both consumer spending and incomes are rising less than expected.
Asian Equities
Asian stocks rebounded sharply, trimming the regional benchmarks greatest monthly decline in 1 years as the probability of a Fed rate cut heightened, supporting growth in the regions largest export market. Hong Kongs Hang Seng Index led the advance jumping 7.9 percent on speculation Hong Kongs borrowing costs will be lowered, and after officials announced the country will proceed with a plan allowing individual purchases of the citys stocks.
Europe
European markets bounced back confidently, paced by exporters and mining companies, on speculation that both the Federal Reserve and the ECB will cut rates in their next meetings. A reflating economy will send commodity prices higher and boost earnings for the miners and oil companies. The Euro zone harmonised index of consumer prices rose 3% year-on-year in November and gains in UK retail sales suggest consumer demand remains resilient. In the forex market, the dollar stabilised relative to the euro.
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Ashburton Bond & Equity Comment - 23 Nov 07
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Tuesday, 27 November 2007
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Fund Manager Comment
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Global currencies and interest rates
Concerns regarding the potential for the credit crunch to drag the American economy into recession deepened this week. As credit spreads widened and bank shares fell to new lows, so investors piled into government bonds, with the 10-year yield falling briefly below 4%. Falling yield support saw the US dollar weaken, with the euro hitting a new record high at $1.4967. In recent times, the yen has been trading contrary to equities; this week proved to be no different with the yen registering gains against all the major currencies.
American Equities
US stocks continued their slide during the holiday-shortened week, as concerns about consumer spending and the overall economy weighed on investor sentiment amid persisting weakness in the housing market, further credit write-downs, and rising oil prices. On the economic front, the Federal Reserve stated in its latest minutes that it was unsure about its decision to lower rates to help cushion the US economy. However, it also cut its 2008 GDP forecast given the financial turmoil in the summer, which suggests the possibility of further rate cuts.
Asian Equities
Asian stocks fell for a third week on concern widening credit market losses will slow economic growth and earnings will be eroded by rising fuel costs. Since the beginning of November the MSCI benchmark has fallen by 10.4% and is on course for its worst monthly decline since September 2001. Chinese regulators fueled declines after instructing banks to cool lending over concerns economic growth has already topped a goal of 15% and threatens to overheat. But on a positive note they also reiterated the plan to allow Chinese investors to buy Hong Kong stocks.
Europe
European equity prices declined sharply as US recessionary fears escalated and investor sentiment fell. Relative to October’s figures, the PMI services index declined whilst the PMI manufacturing index bounced back in November. In Germany, third quarter growth was confirmed at 0.7%. The euro’s continued strength against the dollar provided another negative headwind.
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Ashburton Bond & Equity Comment - 16 Nov 07
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Tuesday, 20 November 2007
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Fund Manager Comment
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Global Currencies and Interest Rates
Despite some stability in the markets over the past few days, the performance of currencies over the past week suggests that investors remain quite nervous. The commodity currencies, in particular those related to oil prices, have been the worst performers, while the Japanese yen has outperformed most other currencies. It has been an eventful week for sterling, which depreciated sharply amid concerns about financial sector weakness and a more downbeat inflation report than expected. The Canadian dolar was the worst-performing currency last week, closely followed by the Norwegian krona. The decline in oil prices and broader risk reduction led to a liquidation of long positions that were arguably extremely large in both these currencies. We closed our long positions in both the Canadian dolar and Norwegian krona over a week ago and therefore avoided the recent volatility. Moreover, we increased our Japanese yen weighting in the core services towards the end of last week.
American Equities
Amid ongoing concerns about the health of the financial sector and the overall economy, the stock market finished the week slightly higher. The October PPI was up 0.1%, versus an expected 0.3% increase, and core prices were unchanged from the previous month. Meanwhile, October retail sales rose a modest 0.2%, but were in-line with expectations and didn't decline as many had feared. A drop in oil prices on Tuesday also helped ease concerns about consumer spending ahead of the holiday shopping season.
European Equities
European markets continued to fall for a third week (-1.0%) contributing to the longest losing streak since July. The basic resources sector lead the decline despite stabilising oil and gold prices. On the foreign exchnage markets, the euro lost a little ground against the dollar (0.2%) but gained significantly against sterling (+2.2%) which fell after the Bank of England’s quarterly inflation report signalled that the bank could cut its rates in 2008. In the Eurozone third quarter GDP growth picked up and headline inflation was contained at 2.6% year on year.
Asian Equities
Asian stocks fell for a second week after commodity price declines hit the basic materials sector hard and financials continued to underperform over fears they may report widening losses linked to the U.S. subprime/credit issues. The yen gained for a second week against the dollar, decreasing the value of dollar-denominated receipts and further reducing exporter’s profits. In China, speculation that the central bank will raise interest rates and a delay in plans to allow citizens to invest directly in Hong Kong’s stock market drove the Hang Seng down
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Ashburton Bond & Equity Comment - 9 Nov 07
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Tuesday, 13 November 2007
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Fund Manager Comment
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Global currencies & interest rates
Markets have been shaken by renewed concerns about the consequences of the subprime and credit market issues. Risk appetite appears to have decreased - for example the VIX index has increased from 21% to above 26% and credit spreads across all sectors have risen. All this has meant FX implied volatilities have increased sharply and caused the higher yielding currencies to fall sharply towards the end of last week. In particular, the yen rose beyond 110 per dollar for the first time in one and a half years and also climbed 1.8% vs the Australian dollar.
American comment
US stocks ended another difficult week lower, as worries about continued weakness in the credit markets kept investors at bay. The resignation of Citigroup CEO Charles Prince last weekend, along with a report that the financial giant will have to write off possibly as much as USD11 billion more in sub-prime related losses in the fourth quarter, added to concerns about the possibility of further losses in the financial sector. Meanwhile, in a bullish sign for the financial markets, the Labor Department reported third quarter productivity rose at a much larger than expected 4.9% annual rate. However, the report failed to lift investors' spirits which remained dampened in the face of soaring oil prices and continued problems in the financial sector.
European equities
The European markets had a poor week, finishing over 3% lower. The mining sector put in a very strong performance (+7.1%), helped higher by a bid on Rio Tinto by BHP Billiton. The European oil services were also helped higher (0.3%) by continued strength in the oil price (finishing the week at USD96.32 per barrel). Financials continued to suffer from the sub prime effects with the Banks ending the week almost 7% lower.
Asian equities
Asian markets fell sharply on the week, with the worst performance in three months following mounting concerns about US subprime problems and global credit problems. Whilst Asian financials should be relatively immune to these problems, the sector nevertheless was hard hit once again. In addition Dollar weakness hurt many export sectors in the region.
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Ashburton Bond & Equity Comment - 26 October 07
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Wednesday, 31 October 2007
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Fund Manager Comment
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Global currencies and interest rates
Bonds generally held onto their recent gains and traded in a fairly narrow range with the main drivers being US interest rate expectations and the direction of the equity markets. In the currency markets the US dollar was sold off across the board and hit a new all-time low against the Euro. The weakness in US economic data, particularly housing, increased expectations of more aggressive cuts in interest rates by the Federal Reserve. Gold also hit a 28-year high mainly on the back of US dollar weakness.
American Equities
Trading in erratic fashion, the major averages finished the week higher, as relatively upbeat earnings for the third quarter overshadowed ongoing concerns about credit-related problems and the overall economy. On the earnings front, Merrill Lynch reported a $2.3 billion loss in the third quarter and said it was taking a larger than expected write-down of $7.9 billion on its collateralized debt obligations and U.S. sub-prime mortgages. With the housing market still in a sharp downturn, the National Association of Realtors reported that existing home sales fell 8% in September to a low 5.04 million annual rate and median home price slipped 4.2% from a year ago. Expectations were for a 5.25 million annual rate. Meanwhile, it was reported that durable goods orders fell 1.7% in September, after a 5.2% decline in August, raising concerns about business spending.
European Equities
Despite a broad based sell-off at the start of the week following G7 predictions that current market turmoil will sap economic growth European equities were higher on the week (DJ STOXX +1.0%) buoyed by positive earnings announcements, particularly in the telecom sector, and a strong performance from the energy sector on the back of a record oil price. Economic data was mixed, business confidence in Germany and France dipped slightly in October, but the expectations component still showed a favourable trend. While the Euro zone PMI manufacturing accentuated the slide in October PMI services bounced back in October, after plunging in September.
Asian Equities
The initial sell-off in the Asian markets was short lived as the markets resumed their strong upward trend driven by strong Chinese economic figures and expectations of lower US interest rates. The Hang Seng ended the week over 3% higher at a record 30,405 and India’s SENSEX Index led by Reliance Industries surged 9.5% after market regulators dropped a proposed ban on registered brokers using offshore derivatives to buy stocks. Elsewhere South Korean equities jumped almost 3.0% on the week on data showing the fastest economic growth in two years, helped by stronger consumer spending. Japanese equities however continued to underperform, 1.8% lower on the week, on concerns over growth and inflation. Figures showed that export growth has slowed sharply and imports were also lower while core CPI inflation continues to be negative and increases the likelihood that the Bank of Japan will delay any proposed interest rate hike.
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Ashburton Bond & Equity Comment - 19 October 07
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Tuesday, 23 October 2007
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Fund Manager Comment
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Global currencies & interest rates
Ongoing concerns regarding the economic fallout from the sub-prime mortgage crisis saw bond prices rebound and the US dollar index hit a new all-time low. The yen was also relatively strong as increased market volatility caused investors to close out their ‘carry trade’ positions.
American comment
The US indices this week were gripped by clear evidence of the impact the weak housing market is having on the US economy. A number of the largest banks reported big falls in third quarter earnings with Citigroup setting the scene with a fall of 57% in earnings, whilst the likes of Bank of America, Wells Fargo and Key Corp also reported disappointing numbers and commented on the poor outlook for the consumer credit markets. To cap it all housing starts fell to a 14 year low and the 20 year anniversary of the 1987 stock market crash weighed heavily on sentiment, leading to a sharp sell off on Friday. Financial stocks were hurt badly falling some -7.6%, whilst the defensive consumer staples group fell -1.84%. There is now a growing fear the third quarter earnings will show a slight fall against expectations of a modest rise just two weeks ago.
European equities
Takeover bids and rumours helped buoy some European equity names (Vallourec and Scottish & Newcastle) but this was not sufficient to offset profits warnings from Ericsson
(-29%) and Philips (-8%) amongst others. However, oil related stocks had a strong week as the price of oil rose above $90 a barrel with supplies tight and renewed geopolitical concerns in Turkey/Iraq. With the sharp sell-off in the US on Friday from further credit market woes, European markets followed suit and finished the week down 2.3%.
Asian equities
After four consecutive weeks of gains, Asian stocks woke up with a bump suffering the biggest weekly drop in two months. Mounting concerns about the US once again hurt Asian exporters and financial stocks, whilst India suffered its largest fall since August. Indian stocks did recover off their lows but still lost 5% over the week. The Indian stock market regulator has proposed tightening rules for foreign investment, a long overdue measure but nonetheless market negative in the short term.
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Ashburton Bond & Equity Comment - 12 October 07
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Friday, 19 October 2007
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Fund Manager Comment
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Global Currencies & Interest rates
Risky assets continued to rally this week reflecting greater optimism among investors. Policy actions have helped shape the recent direction of markets and probably none more than those of the Federal Reserve. The swings in the foreign exchange market have been particularly large recently. Over the past week, the commodity currencies appreciated sharply (NZD, AUD and CAD) against the low-yielding ones (JPY and CHF), while the dollar performed poorly despite positive US economic news over the past week. The Bank of Japan left interest rates unchanged on Thursday at 0.5% as expected.
American Equities
It was a modest up week for the major indices. That is a pretty good performance considering the very strong gains the prior week. The major news item this week was the release of the 19 September FOMC minutes, the take away being that the Fed felt a need to reduce rates significantly because of downside risks to the economy resulting from financial market turmoil. In other economic news the PPI came in above expectations, but the core reading was below while advance retail sales came in above consensus, buoying the market.
Asian Equities
Asian equities powered to another series of record highs for the fourth consecutive week, driven by the commodity, energy and shipping names. Chinese stocks were once again leading the region, but also closely followed by strong moves in Indian equities. In addition, Japan rose on the week on hopes of a recovery in the US and a weakening of the yen.
European Equities
European markets were relatively stable, advancing slightly over the week, (S&P500 + 0.2%). The Fund’s commodity driven equities led and crude oil reached a new high just shy of $84. Financial stocks continued to lag as concern about slowing economic growth and the impact of the credit crunch remains. After remaining virtually static for two months German industrial production increased (+1.7%) whilst French manufacturing output was almost flat (+.01%).The euro rose 0.3% ($1.42).
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Ashburton Bond & Equity Comment - 05 October 07
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Tuesday, 9 October 2007
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Fund Manager Comment
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Global Currencies & Interest Rates
The recent behaviour of currency and other asset markets seems to reflect a belief that the worst is over and that world growth will hold up well. The commodity and high-yielding currencies (Australian dollar, Canadian dollar and Sterling) were once more the best performers, with the safe havens the losers of the week (Japanese yen and Swiss franc). The Canadian dollar continued to perform well after labour market data was released on Friday (employment jumped 51.1k in September, triple the expected gain) reinforcing Canada’s position as the best performing G7 economy.
American Equities
Showing improved sentiment at the outset of the fourth quarter, the stock market finished the week higher as the Labor Department reported strong September job growth, which helped offset concerns of persisting weakness in the housing market and sluggish economic growth. Despite profit warnings from some large banks on Monday, investors looked past concerns about credit market problems and sent stocks sharply higher in the first day of trading for the fourth quarter.
Asian Equities
For the third week in a row, Asian stocks posted new record highs as hopes that the US credit crunch has bottomed, prompted a rebound in financials. Domestic China was closed for the golden week holidays, but early reports indicated retail sales over the period gained 16% year-on-year amid buoyant consumer confidence. Hopes of Asia finally showing signs of decoupling from US growth prompted large scale buying across the region.
European Equities
European markets finished the week on a strong note (FTSE Eurofirst 300 index +2.2%) led by a banking sector rally (+5%) boosting stocks hammered by the credit crisis. UBS, Europe’s biggest bank reported third quarter losses after sub-prime write downs, providing transparency and a sense that the worst of the credit crunch was over. The ECB left interest rates unchanged, although adopted a less hawkish stance by describing rates as accommodative. The Euro pulled back towards US$1.40 level after the US jobs numbers.
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Ashburton Bond & Equity Comment - 28 September 07
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Tuesday, 2 October 2007
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Fund Manager Comment
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Global Currencies & Interest Rates
Lower levels of volatility and increased risk appetite saw a resurgence of carry in the currency markets last week. The Australian dollar and New Zealand dollar were amongst the top performers on the week, rising over 2% and 1.5% respectively versus the dollar. The dollar index (which indicates the general international value of the USD averaging the exchange rates between the USD and 6 major currencies) hit all new time lows after closing below the 78 level late on Friday during New York trading. The increased weakness of the dollar helped to push gold to new highs which closed just shy of the $745 per troy ounce.
American Equities
The US major indices made modest progress this week, although small cap stocks declined. The week capped one of the best monthly September gains since 1998, with the S & P up +3.58% on the month. The undertone was moderately positive following the interest rate cut seen the prior week. This was despite consumer confidence falling and further evidence of weakness in the housing market as new home sales for August saw a fall of -8.3%, against expectations of a fall of -5.2%. However, personal consumption expenditure was positive, rising slightly. Technology issues made the most progress, benefiting as the weak dollar is expected to aid their international earnings.
Asian Equities
Many markets in Asia posted new all-time highs over the week as mainland Chinese money began to be invested in Hong Kong. Commodity stocks in the region were very strong as the US$ declined and demand from China and India remains as firm as ever. Australian gold stocks were particularly buoyant. Japan was also firmer on the week, despite sentiment being almost universally negative, as hopes of large domestic buying led to a strong short covering rally.
European equities
Despite strong advances early on in the week, stock prices struggled to rise, appreciating just 0.05% by the weekend (DJ Stoxx). Gold and oil continued their upward trend with gold reaching its highest level since early 1980. In Friday's trading, the dollar fell to a new low against the euro. Norway's Central Bank raised its deposit rate by 25bp to 5.00% whereas Hungary's Central Bank lowered its key rate by 25bp to 7.50%.
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Ashburton Bond & Equity Comment - 21 September 07
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Tuesday, 25 September 2007
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Fund Manager Comment
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Global Currencies & Bonds
Central bank policy was in the spotlight this week, particularly in the US. The Federal Reserve surprised many market participants by cutting both the fed funds rate and the discount rate by 50 basis points. This provided a boost to risky assets and, within foreign exchange markets, emerging markets and commodity currencies were the best performers during the week. The US dollar, however, fell very sharply against most currencies and its depreciation looks set to continue. Another exciting, if less significant, event this week was the Canadian dollar reaching parity against the USD for the first time in over three decades. Part of this was related to general USD weakness but, in fact, the CAD outperformed most other currencies during the week as well. The recent CAD appreciation reflects strong Canadian macroeconomic fundamentals, specifically elevated energy prices and strong domestic demand.
American equities
Despite their sluggish start, the major averages finished the week higher thanks to the Federal Reserve's decision to lower interest rates by 50 basis points to 4.75%. It was a unanimous decision to help boost economic growth and allay growing fears about a possible recession. The Fed also cut its discount rate by the same amount to 5.25% to help shield the economy from the housing slowdown and turmoil in the financial markets. Meanwhile, a muted reading on consumer prices also supported the market's gain, and offset poor data on new home starts and building permits, which fell to their lowest level for 12 years in August.
Asian Equities
Asian equities struggled early in the week after negative announcements from major banks worldwide regarding the impact of sub-prime mortgages reignited concern about contagion in the credit markets. Volumes were generally light, with investors focused on the all-important Federal Reserve rate meeting on Wednesday. Their surprise cut was mirrored in Hong Kong and markets surged on speculation the move will ease the credit shortage and appease worries over a slowdown in consumption. All sectors rebounded strongly, with property, insurance and commodity stocks the major beneficiaries.
European Equities
European equities had a strong week rising 2.8% led chiefly by the industrial metals (9.9%) and mining sectors, with household goods and food producers lagging. In the euro zone, both PMI indices plunged, with the New Orders sub-indices behind most of the decline. Expectations in terms of forthcoming activity are therefore uninspiring in the wake of the summer financial crisis and the strong euro, (relative to the dollar). The price of crude oil and gold continue to rise.
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Ashburton Bond & Equity Comment - 07 September 07
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Wednesday, 12 September 2007
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Fund Manager Comment
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Bond and equity comment
Global Currencies & Bonds
Most of last week’s central bank meetings concluded a benign outcome, that is, there were no changes in interest rates or suggestions of near-term rate changes. At Thursday’s ECB press conference, Mr. Trichet indicated that the back’s tightening bias is still in place (policy is still on the accommodative side, upside risks to price stability). However, the lack of “strong vigilance” in his remarks presumably means there will be no October rate hike. In the currency markets, the dollar remains under pressure versus the majors and indeed, EUR/USD’s move to the top of the two-week trading range and ability to hold there has seen an increasing number of market participants anticipating an upside breakout. The weak dollar also fuelled the rally in gold towards the end of the week which closed above the $700 level on Friday (the last time gold traded above this area was in May 2006).
Asian Equities
Asian equity markets continued to rise for a third week, led chiefly by the strengthening energy and basic materials sectors and the financials continuing to underperform. Technology also continued its recent strong run. Japan, however, fell on the week as poor economic data led to increased foreign selling and the rising yen pressured exporters.
American Equities
After starting the holiday-shortened week on a strong note, U.S. stocks finished the week lower amid growing concerns that problems in the housing and credit markets are spreading to the job market and weighing on the overall economy. The Institute for Supply Management showed manufacturing activity expanded in August. The ISM index national survey on manufacturing conditions dipped to 52.9 last month from 53.8 in July. That was slightly below expectations but remained steady at a level that reflects moderate growth. The market’s concerns about the health of the economy were exacerbated by the National Association of Realtors’ Pending Home Sales report, which showed pending sales of previously owned homes fell by a record 12.2% in July to its lowest level in six years.
European Equities
The European markets gave back most of their gains over the last two weeks, falling 2.4%. The eurozone PMI manufacturing and non manufacturing final estimates suggest a cooling of economic activity, exemplified by disappointing monthly industrial production and factory orders in Germany. The ECB key refinancing rate and BoE base rate were left unchanged.
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Ashburton Bond and Equity Comment - 31 August 2007
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Thursday, 6 September 2007
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Fund Manager Comment
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Bond & Equity Comment - 31/08/2007
Global Currencies & Bonds
Risk aversion trades remained the play at the beginning of last week as the yen continued to push higher against the majors and bond yields continued to fall. However, there was a turn around, during the latter part of the week, as risk appetite resurfaced as equities rallied and higher yielding currencies regained momentum. Investor sentiment was also helped, after the Bush administration announced plans to help current subprime holders avoid default and to prevent another crisis, such as this from developing in the future.
Asian Equities
Asian stocks gained for a second week, following increased confidence that US mortgage problems will not derail global economic growth, and very robust company earnings, particularly out of China. Renewed interest in the technology sector, after good earnings reports and some industry consolidation, also helped the technology heavy indices across the region.
European Equities
The European markets had another good week (finishing up over 1%). The DAX actually finished up on the month. Much of the soothing market noises have emanated from the US, most notably from Bernanke. The Fund again benefited from some strong moves in the dry bulk shippers, as the dry bulk shipping rate (BDIY) continued to make new highs. The German IFO business confidence index fell in August but the levels remain high.
American Equities
Despite getting off to a rocky start, the blue chip averages managed to regroup to finish the week with only modest losses. The NASDAQ meanwhile, actually ended the week higher, thanks to leadership from the technology sector. In Economic news, second quarter, GDP was revised higher to a 4.0% annual rate of growth from a previously reported 3.4% rate. However, recent credit problems, suggest that the third quarter growth could be much slower. The core personal consumption expenditure deflator rose 0.1% in July less that was expected. This leaves the year-over-year increase at just 1.9%, which is a level many think leaves the door open for a cut in the fed funds rate in light of the credit market situation.
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Ashburton Bond and Equity Comment - 24 August 2007
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Thursday, 30 August 2007
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Fund Manager Comment
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Global Currencies & Bonds
Last week saw some incredible moves in the currency markets: the yen sold off significantly from its highs of just over a week ago (losing 1.5% and 3% vs the dollar and sterling respectively). The higher yielding plays (NZD and AUD) have rallied close to 5% off their lows seen on 16 August and were the top two performing G10 currencies on the week against all the majors. These movements in the FX markets were sparked by increased risk appetite in the global equity markets as the major indices have rallied off their lows. However, despite the fact that risk appetite has indeed made a comeback, there is still some question as to whether it can be sustained. It would be too early to describe these recent developments in the FX markets as a “return to carry”, particularly given the high levels of volatility which are still prevalent.
US Equities
The market tone was much improved this past week as the major indices logged sizable percentage gains. Despite continued negative headlines on the sub-prime exposure, the market remained strong and T-bill rates pushed higher, providing a signal that fears about a liquidity crisis have eased in the wake of the Fed cutting its discount rate and its accommodative repurchase agreements. All S&P index groups finished positively, with materials the strongest and financials the weakest. It was a light week for economic data. Durable goods orders surged 5.9% last month after an upward revision to 1.9% in June. That easily beat market expectations and is encouraging news for business investment and manufacturing production.
Asian Equities
After falling 15% in the prior four weeks, Asian markets posted a strong recovery gaining nearly 8% over the week, the best performance since March 2002. The financial sector continued to underperform, especially after the Bank of China disclosed it had exposure of over US$9bn in US sub-prime loans. Whilst small as a percentage of assets, losses from this exposure could potentially hit profits on a large scale. Otherwise, stocks and sectors rebounded sharply from recent lows, as the view gathers momentum that Asia could ultimately be the prime beneficiary of falling US interest rates.
European Equities
The European markets experienced a concerted ‘bounce’ this week (+1.4%) but lagged the US and Japan. The Fund outperformed, helped higher by its exposure to the Dry Bulk shippers. The Dry Bulk market, throughout the market turmoil of the past three weeks, has been very resilient and is in fact attempting to make new highs. This illustrates the strength in global demand for coal and iron ore has continued. The Fund’s commodity stocks also had a strong week as investors started to take more comfort from the fact that these stocks have strong cash flows and strong balance sheets. On the macro side, unsurprisingly, German the forward looking business confidence figure (ZEW) and the European Purchasing Managers Index both declined in August.
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Ashburton Bond and Equity Comment - 17 August 2007
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Thursday, 23 August 2007
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Fund Manager Comment
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Global Currencies & Bonds
Bond markets rallied strongly as investors continued to fret about the ongoing ‘credit crunch’ and its likely impact on the real economy. Yields fell particularly sharply at the front end of yield curves as expectations of emergency rate cuts started to build, culminating with the Federal Reserve’s decision to cut its discount rate on Friday. This policy change saw the yen relinquish some of its earlier gains but it still finished the week with big gains versus all the other major currencies.
US Equities
An extremely volatile week was seen by the US Indices as sustained selling led the markets lower. Financial stocks fell sharply following Countrywide Financial Corp’s profit warning due to mortgage market disruptions and comments regarding it’s difficulty in obtaining financing from creditors. There were also reports of difficulties by international banks’ due to exposure to failing collateralized debt obligations (CDOs) and losses by hedge Fund groups. This led to fears of a credit squeeze, and it’s subsequent impact on the economy. Such was the extent of the panic that investors worldwide took fright, which led to the dramatic decision on Friday by the Federal Reserve to reduce the discount rate it lends to banks by 50 bps to ease liquidity conditions and attempt to shore up confidence. A late rally was seen but it failed to revive basic material stocks which had been particularly hard hit, although financials did recover substantially.
Asian Equities
Asian markets tumbled following announcements by several major banks across the region of losses related to sub-prime loans. Widespread uncertainty over the extent of the turmoil and genuine fears over a global credit crunch have led an evaporation of liquidity and risk appetite. All indices and sectors were marked down sharply, with many recording their worst weekly performance in several years. Japan’s woes were compounded by an unwinding of the carry trade, increasing the value of the yen and hurting exporters. Domestic economic data, whilst encouraging, is being ignored for the moment as all eyes remain firmly focused on events in the US.
European Equities
European Equity markets had a turbulent week (falling 0.5%). At one stage they were down over 3.5%, until Friday afternoon provided a 3% rally, following the US Fed’s cut in primary credit discount rate by 50 bp to 5.75% (with the intent of providing enhanced liquidity). The ECB injected a massive €47.66bn and was followed by the Fed’s injection of €17bn into the money markets. The oil price corrected back to $69.7 and the dollar strengthened to €1.35.
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Ashburton Bond and Equity Comment - 03 August 2007
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Wednesday, 8 August 2007
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Fund Manager Comment
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Bond & Equity Comment - 03/08/2007
Global Currencies & Bonds
Last week saw the currency markets settle somewhat after the previous week’s, risk aversion trades and higher volatility. The US dollar sold off once again, whilst the Canadian dollar was the pick of the G10 currencies rising nearly 1% on a broad basket basis helped by the rising oil price. However, credit concerns are likely to remain the key driver of the FX markets this week and it could be a while before we see risky assets reverse their loses. This backdrop is not encouraging for the carry trade and the higher yielding plays which are still being avoided by investors for the time being.
US Equities
A third week of falls was seen by the US indices with economically sensitive small cap issues particularly hard hit. The impact of sub-prime mortgage defaults and deteriorating credit is now visibly impacting business with Accredited Home Lenders stating that it may file for bankruptcy whilst American Home Mortgage has laid off 7,000 employees as it stopped accepting mortgage applications. Financials and home building shares were very weak whilst energy stocks also saw profit taking. Economic indicators were mixed with the PCE index indicating moderate price pressures, although unemployment did rise slightly from 4.5% to 4.6%. On a brighter note the second quarter earnings season has seen overall results coming in at over 10%, which are double most expectations.
Asian Equities
Asian equity markets fell for a second week on continuing concerns over the US sub-prime loan crisis, inspite of generally supportive earnings from corporates in the region. All bourses fell on the week, with the exception of domestic Chinese indices which recorded a strong up lift on good corporate results.
European Equities The volatility of recent weeks continued as further concerns regarding how the sub-prime might affect US and Global growth worried investors. However, despite the fluctuations the pan-European markets were only down 0.1% on the week as some’ bottom fishing’ took place. With oil services and mining under-performing, whilst telecom and healthcare (which the Fund has under-weighted) relatively strong, the Fund underperformed slightly. On the economic side, as expected, both European and UK rates remained unchanged
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Ashburton Bond and Equity Comment - 27 July 2007
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Tuesday, 31 July 2007
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Fund Manager Comment
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Bond & Equity Comment - 27/07/2007
Global Currencies & Bonds
Risk aversion trades were widespread in the currency markets last week and were sparked by worries in the sub-prime mortgage troubles, widening credit spreads and tumbling stock markets. Both the yen and the Swiss franc were major beneficiaries of the increased volatility whilst high yielding plays (New Zealand dollar, Turkish lira) were hit badly as investors took profits on their carry positions.
US Equities
US stocks tumbled in the past week on signs that sub-prime mortgage troubles are making their way into prime mortgages and corporate lending markets, which could potentially hinder future leveraged buyout deals that have been a boon for the market. Although Friday's GDP data came in better than expected and momentarily lifted stocks, it was dismissed by the markets as old news. Investors remained focused on troubles in the mortgage and corporate lending markets.
Asian Equities
Asian equity markets fell sharply during the week as poor US housing data suggested default issues will not be confined to the sub-prime sector. Whilst the region has been particularly resilient to any adverse news concerning global growth so far, the added combination of disappointing results and fears of a credit crunch proved to be a tipping point. The majority of indices were offside by 3-5% as investors chose to lock-in gains following the strong performance of stocks this year. All 10 sectors were marked down, with raw-material producers and exporters particularly affected. However, regional fundamentals remain firmly intact and the question remains as to whether the move is just a much-needed correction or something more sinister.
European Equities
Market worries over the US sub-prime fallout, and rising interest rates led to a very shaky week, with the European markets falling over 5%. The Fund’s mining stocks were hardest hit, followed by its Oil service stocks. Moves which (considering their good cash flows in an environment of concerns over rising interest rates and excessive leveraging) can be put down to profit taking. On the macro side, there was a slight contraction in the German IFO and inflation accelerated.
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Ashburton Bond and Equity Comment - 13 July 2007
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Thursday, 19 July 2007
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Fund Manager Comment
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Global Currencies & Bonds
Both the Swedish krona (SEK) and Norwegian krone (NOK) held up particularly well last week against all three majors (USD, EUR and GBP). The SEK maintained its momentum from last week after hawkish comments from the Riksbank whilst the NOK benefited from a stronger oil price and higher interest rate expectations. Elsewhere, the Australian dollar remained firm and the yen weakened as investors continued to chase yield whilst cable had its highest weekly close in over 26 years at 2.0353. With its uptrend remaining firmly intact, cable is now poised to test the 2.07 level in the coming weeks.
US Equities
US Stocks finished higher for the week, leaving the S&P 500 at record levels, despite lingering concerns about the subprime mortgage market and the health of the economy. It was Thursday’s rally that saw the Dow record its biggest percentage gain in nearly four years on the news that giant Rio Tinto Group made a white knight bid for Alcan Inc. The same-store sales data that was released was not nearly as strong as the market reaction suggested. Nonetheless, bulls ran with the news and prompted a wave of short-covering activity.
Asian Equities
Japanese equities advanced on the week as a better than expected May machinery orders figure (+5.9% vs. +1.9%) and stronger US retail sales reassured investors over the sustainability of global growth. Exporters paced the advance, led by Nintendo. Elsewhere in the region, Asian markets climbed to a record, led by metals and mining stocks, following Rio Tinto’s proposed takeover of Alcan Inc. The deal generated optimism amongst investors over further industry consolidation and M&A activity. Sentiment was also aided after Korea raised it’s benchmark interest rate 25bps to 4.75%, suggesting the economy is in decent shape, whilst Singapore reported a very strong second quarter GDP number of +3.2%.
European Equities
European equities were up almost 0.5%, led higher by the industrial engineering stocks (+2.9%), industrial metals (+2.5%) and oil services (+2.1%). The Fund benefited from its exposure to the dry bulk shipping stocks, as the dry bulk index surged 8% higher (following a build up in Australian port congestion). The Oil price was also firmer and remains at near record levels, as news of North Sea pipeline problems hurt sentiment regarding supply.
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Ashburton Bond and Equity Comment - 6 July 2007
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Tuesday, 10 July 2007
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Fund Manager Comment
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Global Currencies & Bonds
The Swedish Krona remained firm last week (up 1.0% on a broad basket basis) benefiting from the hawkish Riksbanks minutes. The deputy governor (Oberg) stated that Sweden’s key rate could head to 5.0% from the current 3.5% and believes the Swedish economy is at risk of overheating. Elsewhere, the Canadian dollar continued to benefit from better than expected economic data (payrolls rising double their forecast). With inflation risks on the upside, the general consensus is that the Bank of Canada with raise its target overnight rate by 25bps to 4.5% on 10 July which will add fuel to the Canadian dollar.
US Equities
The major indices logged big gains driven by leadership from the technology sector and some supportive economic data. The gains came despite a jump in oil prices above US$72 and the yield on the benchmark 10-Year Treasury note rising from 5.03% on Monday to as high as 5.20%. The Labor Department's June employment report painted a picture of solid job growth that has been accompanied by rising wages. M&A activity came back to the forefront with Blackstone’s US$26 billion offer to take Hilton Hotels private.
Asian Equities
Asian equity markets rallied following encouraging political developments and continued investor optimism that sustained economic expansion and earnings growth in the region will offset any slowdown in the US. Comments from North Korean leader Kim Jong Il that the country is ready to dismantle it’s nuclear programme led to a surge in the South Korean market, with the index rising almost 7%. China’s CSI 300 Index pared its losses on Friday, rallying 5% on speculation the government will introduce measures to support share prices. Hong Kong, India, Indonesia, the Philippines posted new records, whilst Thailand touched a 10-year high on rumours an elected government will be in place before year-end.
European Equities European markets finished the week 1.5% higher. The Fund was helped by a strong performance in its mining and oil service stocks. Brent crude rose further (US$76.12) and is now heading towards a test of their highs (US$78.63). The truce in Nigeria has come to a halt, and escalating violence has prompted Shell to shut in about 500,000m barrels a day, with no intention of restarting production in ‘07. OPEC has also stated that they will not raise production and US refineries continue to have problems. Domestic stocks struggled in an environment where interest rates are rising or expected to rise (affirmed by the Eurozone weak May retail figures). The BOE raised rates 25bp (5.75%) and the ECB left rates unchanged.
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Ashburton Bond and Equity Comment - 29 June 2007
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Tuesday, 3 July 2007
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Fund Manager Comment
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Bond and equity comment
Global Currencies & Bonds
Global bond yields fell last week as investors took advantage of the recent sell off and bought safer investments as a general risk reduction exercise. This followed through to the currency markets as both the Swiss franc and Japanese yen were stronger across the board whilst higher yielding plays such as the Australian and New Zealand dollar sold off during the middle of the week.
US Equities
Investors' anxiety levels remained high in the past week, as the indices finished only slightly higher despite falling bond yields. As expected, the FOMC left the fed funds rate at 5.25% for an eighth straight meeting, despite lingering concerns about weakness in the economy as problems in sub-prime lending have weighed on a housing recovery and have created unease in the financial markets. The accompanying policy statement was little changed, except for a mention that core rates of inflation have eased in recent months but that a sustained moderation in inflation pressures has yet to be convincingly demonstrated.
Asian Equities
Worries concerning the US housing market prompted profit-taking in Asia after recent strong gains. Most indices in the region fell, with domestic Chinese shares leading the way. Japan fell marginally but the retail sector gained following a long period of underperformance. Taiwan was one of the few gainers on the week, following increased bullishness on the technology space.
European Equities
European markets finished the week 0.4% higher, led higher by the oil sector. The price of Brent remained above the $70 per barrel mark, as gasoline inventories in the US again disappointed on the downside. The number of German job seekers declined by a further 37,000 in June, however, retail sales disappointed in May (-1.8%). In France, there was a pick-up in June’s business confidence and unemployment fell. In the UK, the formalities of the PM handover to Brown were completed.
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Ashburton Bond and Equity Comment - 22 June 2007
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Tuesday, 26 June 2007
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Fund Manager Comment
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Bond & Equity Comment
Global Currencies & Bonds
The Scandinavian currencies fared particularly well last week against the majors: the Swedish krona rallied sharply on Wednesday after the Riksbank raised interest rates by 25bps to 3.5%. Although this was widely expected, hawkish comments followed the decision which helped to push SEK higher and reverse the downward trend seen of late. Likewise, the Norwegian krone put in a very strong move on Friday helped by a decent move in the crude oil price and higher interest rate expectations.
US Equities
The sell-off in the American market was broad-based but in light of the concerns about rising interest rates and the uncertainty regarding the hedge fund community's exposure to the sub-prime fallout, it was little surprise to see the financial sector pacing the broader market's retreat. The May Housing Starts and Permits report was mixed and did not have much impact on economic expectations or the market since the data were largely from a period before the recent spike in interest rates. The trend in new claims for unemployment remained steady and continued to reflect tight labour market conditions. Meanwhile, the Philadelphia Fed reported a much stronger than expected report on regional manufacturing activity but that report didn't have any real impact ahead of next week's FOMC meeting.
Asian Equities
Asian equity markets posted another weekly gain, fuelled by surging liquidity flows and optimism that consumer spending will continue to drive corporate profits across the region. In Japan, exporters led stocks higher after a government report showed export growth doubled in May, whilst a weakening yen provided underlying support. Hong Kong’s Hang Seng index jumped almost 5% to a new record after the Chinese government gave approval for mainland brokerages to buy shares overseas. Australia, China, Indonesia, Malaysia, Singapore, the Philippines and South Korea also posted record highs, whilst Taiwan touched levels not seen since June 2000.
European Equities European bourses had a weak week, ending 2% lower, led lower by the general retailers (down 4%) and real estate and travel and tourism (down 3.7%). The oil service companies were supported by a series of strong rig fixtures at bullish rates and long durations sending the sector 1.3% higher. Germany saw a slightly disappointing IFO number, with a deterioration in the future components of the two indices mainly due to concerns over the long bond yields.
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Ashburton Bond and Equity Comment - 15 June 2007
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Tuesday, 19 June 2007
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Fund Manager Comment
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Global Currencies & Bonds
The blood bath in the bond markets continued last week as US 10 year yields climbed higher by Wednesday touching the 5.32% level. However, the continued rise in global bond yields did little to dampen investors' risk appetite in the currency markets. Carry still remains the favoured trade as the yen sold once more and now looks to test the 125 level vs the dollar. The short bout of dollar strength seen of late now appears to be stalling as both the euro and sterling look to have regained momentum and are now trying to push back to higher levels.
US Equities
The markets rebounded from last week's sell-off as upbeat economic data, highlighted by Friday's CPI report, provided some relief on the inflation front and helped ease investors' worries about rising interest rates. Core CPI in May was up just 0.1%. That was below the 0.2% increase forecasted by economists and brought the year on year increase in the core rate to 2.2% from 2.3% the previous month. In corporate news, financial firms Lehman Brothers, Bear Stearns, and Goldman Sachs reported quarterly results in the past week. Both Lehman and Goldman topped expectations despite tougher year on year comparisons.
Asian Equities
Asian equity markets advanced after better than expected US retail sales and positive comments from the Federal Reserve reassured investors that consumer spending can be sustained in the region's largest export market. Despite rhetoric from China's central bank that it was 'closely' monitoring rising food costs, the CSI 300 index rallied over 7% on the back of surging liquidity as savings rates remain capped below the rate of inflation. Elsewhere in the region, South Korea, Singapore, the Philippines and Indonesia posted new records, whilst Taiwan touched a seven year high. Energy and basic materials counters benefited from rising oil and metals prices, whilst exporters surged as sentiment improved over the resilience of the US economy.
European Equities
European markets had a very strong week, rising 3.6% and are up nearly 10% on the year. Mining was the best performing sector (up 9.3%), and pharmaceuticals and Biotech the worst (dragged down by Sanofi's failure to get their obesity drug, Acomplia, approved by the US FDA). Brent Crude rose to $71.50, following several bullish signals. Oil refineries continue to display operational fragility (utilisation remains stubbornly low despite the urgent requirement for gasoline). Iran continues to defy calls for its cessation of uranium enrichment, the Israeli-Gaza issue looks to be escalating as does the Nigerian insurgents quest to disrupt oil production in the Niger Delta. All of this at a time when we have entered the hurricane season, potentially disrupting Gulf Of Mexico supply.
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Ashburton Bond and Equity Comment - 08 June 2007
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Tuesday, 12 June 2007
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Fund Manager Comment
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Global Currencies & Bonds
Global bond markets were the major headline last week as yields rose sharply on concerns about inflation and higher interest rates. US 10 year yields nearly touched the 5.25% level on Friday which was last reached in June 2006. This created some volatility in the currency markets as the general theme was risk reduction. The dollar was a beneficiary of the higher bond yields rising against most of the majors whilst the yen rose 1% against sterling and the euro.
US Equities
After a promising start to the week, rising global interest rates and concerns about inflation ultimately led to a broad sell-off in US stocks and bonds over the past week. The ISM Services Index came in at 59.7 for May, higher than the 56.0 number reported for April. That news followed a stronger than expected read for U.S. manufacturing activity in the prior week. The negative tone on Wednesday was exacerbated by a report that first quarter productivity was revised down to 1.0% from a previous read of 1.7%, while unit labor costs were shown to have risen a higher than expected 1.8% from the 0.6% rate initially reported.
Asian Equities
Asian equity markets began the week in a positive fashion before retreating on concern rising global interest rates will dampen spending and investment. In Japan, the Nikkei slipped 1%, led by property developers as the five year government bond yield climbed to a record. Elsewhere in the region, Australia dropped after a bigger than expected employment increase heightened concern the central bank will raise rates to keep inflation in check. Singapore, Malaysia, India and Indonesia all posted a negative performance as investors chose to take profits following recent gains.
European Equities
European equities were down 3.6% last week, as the market fretted over increasing inflationary pressures and its effect on the interest rate profile going forward. Oil and gas production was the strongest sector (-0.7%). Recent US inventory figures continue to highlight the fragile state of the US refineries. As the refineries attempt to ramp up production to replenish the low gasoline inventories, they break-down. The multi decade under-investment in the refinery space is starting to really show. As expected, the ECB raised rates by 25bp to 4% and the BOE left rates unchanged (5.5%).
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Ashburton Bond and Equity Comment - 01 June 2007
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Wednesday, 6 June 2007
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Fund Manager Comment
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Global Currencies & Bonds
The high yielding and commodity linked currencies such as the Australian dollar and New Zealand dollar were the pick of the crop for currency investors last week. The New Zealand dollar rose 2.5% on the week against most of the majors whilst the lower yielding safer haven plays (yen and Swedish krona) continued to sell off.
US Equities
The S&P500 index was up each of the four days of this short week and also set a record closing high. The market was up regardless of the news with the underlying bullish sentiment supported by perceived liquidity issues driving the market. The minutes reflected exactly what was in the policy statement previously released - that the Fed's predominant concern remains inflation, that low levels of unemployment create inflation risks, and that the economy is expected to pick up over the rest of the year. However, the core personal consumption expenditure (PCE) deflator was up just 0.1% for April. That was below an expected 0.2% increase and brought the year-over-year gain down to 2.0%. That is at the top of the Fed's forecast range of 1.75% to 2.0% for 2007 for the first time since the Fed stopped raising rates. The earnings calendar was light. Dell rose after it reported earnings above expectations but gave a mixed outlook and announced layoffs.
Asian Equities
Asian markets posted another positive week, with many regional indices reaching new all time highs, even in the face of a sharp fall in domestic Chinese stocks after the government tripled securities transaction taxes. Commodity stocks posted strong gains across Asia, along with exporters, on hopes of recovering US growth.
European Equities Pan European markets advanced strongly over the week despite a knee-jerk sell-off following Shanghai’s shakeout. By the end of the week the benchmark was up 1.8% at a 6½ year high, with the markets once again being buoyed by takeover speculation and share buy-back news. The auto sector, which the fund is overweight in, was particularly strong as Renault confirmed its business plan and operating margins.
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Ashburton Bond and Equity Comment - 25 May 2007
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Wednesday, 30 May 2007
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Fund Manager Comment
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Global Currencies & Bonds
The Norwegian krone was one of the strongest major currencies last week helped by the rising oil price. The US dollar turned lower once again and was particularly weak against sterling with cable now trading back near the 1.9850 level. Elsewhere, the yen continued to slide versus all the major currencies. However, the technical signals now look poised for a possible yen recovery in the not too distant future.
US Equities
The S&P flirted with its old major record high this week, last seen in March 2000, before easing back and settling slightly lower. Comments from the Fed policy minutes reiterated that inflation was a prime concern although this was broadly overlooked. New home sales showed an improvement, although April’s existing home sales data left something to be desired reflecting a -2.6% fall, the lowest in four years. Retail sales same store sales data also saw a broad decline suggesting that consumer spending may be subsiding. Corporate activity remains elevated with an offer for Alltel Corp being seen, whilst speculation over the outcome to Alcoa’s bid for Canadian group Alcan continued apace.
Asian Equities
Asian equity markets continued unabated, with China advancing for a tenth consecutive week breaching the 4000 level on the CSI 300 share index. This even on the back of Greenspan stating that the rally in Chinese shares “is clearly unsustainable.” Equally Korea, Taiwan, Malaysia and Singapore all made new highs in the week. However, dramatically improved US home sales data hurt exporters, damping speculation that the Fed would cut interest rates, leading the yen to its lowest level against the US dollar in 3 months.
European Equities
European markets finished the week very slightly down (-0.2%). The German macro news was largely positive. The IFO was stable, the ZEW improved and German business investment was healthy for Quarter 1. In France we saw a more mixed picture, as the business confidence survey drifted lower and consumer spending on manufactured goods disappointed slightly.
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Ashburton Bond and Equity Comment - 18 May 2007
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Wednesday, 23 May 2007
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Fund Manager Comment
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Bond & Equity Comment - 18/05/2007
Global Currencies & Bonds
The Canadian dollar was the top performing major currency last week, rising over 2% on a basket basis. The US dollar was flat versus sterling, hovering around the 1.9750 level. However, there is still another chance that we may see one last push higher towards 2.00 in the weeks ahead. The yen continued to slide but had a bout of strength on Friday after the People’s Bank of China raised interest rates by 18 bps and widened the yuan’s trading band from 0.3% to 0.5%, causing carry trades to come under pressure.
US Equities
The Dow Jones and the S & P made further progress this week at the expense of smaller cap issues and the tech laden Nasdaq, both of which fell slightly. Earnings reports remain buoyant and with 80% of the current earnings season in, it does seem likely that earnings in the high single digits will be seen, much to the surprise of many analysts. Economic news has also improved moderately with year on year inflation flat at +2.1%, within the Fed’s target forecasts. Manufacturing and service data were also supportive, although the housing markets woes were there for all to see with a -4.9% drop in March home sales and a fall of -1.8% in the median price of a home in the first three months of the year. The indices appear to be looking past any short-term issues as corporate activity and bullish sentiment are visibly rising.
Asian Equities
Asian stocks were mixed as metals price declines pulled down the big commodity heavy- weights. Corporate guidance in Japan continues to disappoint, leading to heavy foreign selling and unusually low sentiment levels. Elsewhere, Korea climbed for the 11th week, whilst Australia and Singapore made new highs. At the close on Friday, China announced a series of tightening measures aimed at cooling the economy and stock market, although the measures were less aggressive than expected.
European Equities Pan European equity markets reached 6 1/2 year highs, albeit in light volume due to the Ascension Day holidays. There was little macro news, other than confirmation that euro-zone inflation remained below the Central Bank’s target, which was obviously positive for the markets. The gains were once again led by merger and acquisition activity ,particularly in the construction, financial and utility sectors.
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Ashburton Bond and Equity Comment - 11 May 2007
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Wednesday, 16 May 2007
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Fund Manager Comment
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Bond and equity comment
Global Currencies & Bonds
Cable underwent a period of consolidation last week and dropped towards the 1.98 level at the close on Friday. The yen weakness continues across the board as investors persist with the carry trade. Elsewhere, gold dropped around 3% on the week after the market witnessed some sharp profit taking and the bout of dollar strength.
US Equities
The stock market retained its upward momentum early this past week. On Wednesday, the Dow was up for the 24th time in 28 days. The big news early in the week was the Fed policy statement on Wednesday. The Fed left rates unchanged and the policy statement re-iterated that inflation was the predominant concern, but it really wasn't much of a surprise in any respect and the S&P rose modestly after the announcement. Other economic news included the core PPI for April which brought good news as it was unchanged for the second straight month. Mergers and acquisitions continued to remain a key factor in the bullish argument. Alcoa bidding for Alcan was the top acquisition story. Reuters and Thomson Financial also confirmed that they are considering a merger. Buffett also said that Berkshire Hathaway would consider a major acquisition.
Asian Equities
Asian equity markets continued their ascent, fuelled by surging liquidity flows and earnings optimism. South Korea, China, Australia, Indonesia and New Zealand all posted record highs before profit-taking emerged following weaker-than-expected US data. The basic materials sector found itself in the spotlight once again on rumours that BHP would be bidding for competitor Rio Tinto. Japan remains firmly in a trading range as ultra-conservative earnings forecasts and a lack of a short-term catalyst provide headwinds to the market.
European Equities
European equity markets fell over the week, down 0.7%, as profit taking came to the fore during the early part of the week. However, losses were pared back from down 2.4% driven by US gains, following economic data and bid speculation in the banking, media, mining and utility sectors across Europe, which galvanised the markets on Friday
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Ashburton Bond and Equity Comment - 04 May 2007
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Wednesday, 9 May 2007
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Fund Manager Comment
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Bond and equity comment
Global Currencies & Bonds
The bond and currency markets were generally becalmed in a week of numerous public holidays around the world. The US dollar retraced some of its recent losses, as economic data suggested that the American economy may be marginally stronger than was widely feared.
US Equities
It was another strong week in the American markets. This was again mainly driven by the growth in aggregate operating earnings for the S&P 500 companies. We are now on track for 8.5% growth, up a bit from 8% at the beginning of the week. The large number of acquisitions is also providing long-term optimism. This week, the big one was that News Corp. wants to buy Dow Jones at a huge premium to its market stock price. Cablevision may also go private. The economic news this past week also leaned slightly positive. There was a flat reading on the core personal consumption expenditures for March which is the Fed's primary inflation measure. The year-over-year increase dropped to 2.1% which is within the Fed's 2007 forecast of 2% to 2.25% for the first time this year.
Asian Equities
Another week and another round of all-time highs for Asian markets, including Korea, Hong Kong, Singapore, Malaysia and Australia. Markets were driven higher by energy and metals counters, particularly in Hong Kong where PetroChina has made the largest Chinese offshore oil discovery in over 40 years. Japan spent the majority of the week closed due to the Golden week holidays, whilst inflation in India fell more than expected.
European Equities
No big surprises on the economic data front in Europe. However, continued acquisition activity continues to push markets higher. Financing remains cheap and asset rich companies are prime targets. This week Reuters, Hanson and Morrison are the new potential takeover targets.
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Ashburton Bond and Equity Comment - 27 April 2007
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Wednesday, 2 May 2007
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Fund Manager Comment
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Bond and equity comment
Global Currencies & Bonds
The Federal Reserve’s trade-weighted dollar index fell to the lowest since its inception in 1971 amid expectations the currency will extend the slide against the euro. The Dollar index is now down over 2% on the year. The Canadian dollar was particularly strong against most of the major currencies (rising to a seven month high against the US dollar) bolstered by increasing prices for commodities.
US Equities
U.S equities moved to new highs (all-time for the Dow Jones, near-term for the S&P500) driven by continued strength in Q1 earnings. The strong corporate performance was in stark contrast to the underlying economic news where the Q1 GDP came in much weaker than anticipated, at 1.3% along with a higher than anticipated deflator which led to talk of stagflation. In addition, Housing data showed further weakness as New Home sales disappointed. There were some particularly notable earnings releases that buoyed sentiment, these included: Apple, Microsoft, Amazon, Corning, Whirlpool, 3M, Cummins and Baker Hughes. Within the S&P500, Industrials, Technology and Energy led the way whilst Telecom Services lagged.
Asian Equities
Asian equity markets struggled to make headway this week as weaker than expected US economic data suggested growth may be slowing in the region’s biggest export market. Japan remains stuck in a trading range following comments from the BOJ that rates will stay at ‘very low levels for some time’, whilst losses at consumer lenders also weighed on sentiment. Elsewhere in the region, China, Indonesia and South Korea all posted records before a bout of profit-taking emerged and India suffered on stronger than expected inflation data. The energy sector bucked the trend, as crude oil pushed back above $65 following supply disruption concerns in Nigeria and Europe.
European Equities
The MSCI Europe fell 0.7% last week, dragged lower by a nervous Spanish market (IBEX -4.9%). The IBEX fell on concerns over real estate valuations and the potential impact of law changes. Lending to Spanish consumers is growing at three times the rate of the euro-zone and the impact of higher interest rates will impact their economy more significantly than others. In the commodities market, Brent rose to $66.1/bbl, as the Saudi arrest of over 100 terrorists showed the world that serious terrorist activity is planned on oil infrastructure. There was a slew of strong earnings announcements, particularly from Germany. The German business confidence number was better than expected, led higher by the future component. While French unemployment fell again, providing further encouragement to the bulls.
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Ashburton Bond and Equity Comment - 20 April 2007
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Tuesday, 24 April 2007
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Fund Manager Comment
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Global Currencies & Bonds
Bonds recovered their poise this week as US economic data alleviated near term inflation concerns. UK bonds underperformed this week following the news that headline inflation had breached 3%, the level that requires the Governor of the Bank of England to write a letter of explanation to the Chancellor. Expectations of higher interest rates boosted sterling, which strengthened against all the major currencies.
US Equities
Earnings propelled the stock market higher this week. So far, with about 25% of the S&P 500 companies having reported, around 67% of companies have beaten expectations, in line with the long-term average. Earnings growth is looking to come in at around the 5% mark. The economic reports this week were also supportive to the stock market. March retail sales rose a larger than expected 0.7%, March housing starts were up 0.8% and March CPI data was bullish, the core rate was up just 0.1% which helped ease inflation fears.
Asian Equities
Asian equity markets posted another weekly gain as positive economic and corporate news continued to attract liquidity flows to the region. The tone was set following an encouraging G7 meeting, where policymakers suggested that global growth would not be derailed by a slowdown in the US. Sentiment was aided by consistent earnings surprises and private equity activity. Australia, China and South Korea all posted record highs during the week, before a raft of first quarter economic data from China (including GDP of +11.1%) led to some profit-taking on concerns that further austerity measures may be introduced.
European Equities
The market shrugged off a mid-week wobble, as China issued such strong growth numbers that the market reacted with a short-term sell off, worried of possible policy ramifications. In the euro-zone the CPI rose 1.9% year on year, within the ECB’s 2% window. Trichet continues to operate with the view that there are ‘persisting risks to inflation’. Another 25bp hike in June continues to look likely. The German ZEW continued its rise, following a March plateaux. German growth continues, as global demand remains robust and domestic activity remains strong, undeterred by tighter monetary policy.
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Ashburton Bond and Equity Comment - 13 April 2007
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Tuesday, 17 April 2007
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Fund Manager Comment
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Global Currencies & Bonds
The dollar was weak against most of the majors which helped to push the gold price to higher levels last week. Cable is now edging closer to the widely talked about 2.00 level and we may see it hit this in the not too distant future.
US Equities
The US markets had a fairly quiet week. However, all the major indices closed in positive territory. The best news this past week came on the earnings front. Alcoa posted earnings above expectations. General Electric merely came in at expectations. But Merck raised estimates for the full year and McDonald's did likewise for the first quarter. The macro news was generally bearish. Most significantly, the minutes of the Fed policy committee meeting of 21 March threw cold water on expectations of an imminent rate cut. New claims for unemployment jumped for the week ended 7 April to 342,000 from 323,000 the week before while the March core PPI was weaker than expected and remained unchanged. The flat core was good news, but also may not reflect a trend.
Asian Equities
Asian equities posted a positive performance on the week, as better than expected employment data from the US eased concern over slowing regional exports. In Japan, property-related names led indices higher after an industry report showed office vacancies at ultra-low levels, although some profit-taking ensued as weak machinery orders data dampened sentiment. Elsewhere in the region, the technology sector advanced after LG Phillips reported a smaller loss than expected, whilst mining stocks continued to benefit from surging metals prices, with copper trading at 7 month highs, and gold approaching US$700. Australia, China, South Korea and Indonesia all touched record highs.
European Equities
European Equity markets had a strong week, rising by almost 1%. Oil and Gas was the best performing sector and rose 1.6%, as Brent Crude reached $69 per barrel. (its highest since August 2006), following a considerable drawdown in US gasoline inventories and a shortage of refining capacity. The ECB left the key rate unchanged at 3.75%, but hinted that one more hike was likely.
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Ashburton Bond and Equity Comment - 05 April 2007
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Wednesday, 11 April 2007
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Fund Manager Comment
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Global Currencies & Bonds
A few notable changes were apparent in the currency markets last week: the Japanese yen remained soft against the majors and was particularly weak against the euro, whilst the US dollar was slightly stronger against the sterling but traded in a range versus the rest of the majors. Euro/yen is now trading around the high seen in late February which is a key resistance level for the euro.
US Equities
Although a short week for the stock market leading into the Easter break, it certainly wasn’t short on strong market performance, with each of the major indices gaining more than 1.5% for the week. Economic data wasn’t terribly impressive. On Monday the ISM Index, a gauge of national manufacturing activity, pointed to slowing growth and rising prices. There was a sizeable rally on Tuesday in response to the 0.7% increase reported for February pending home sales, but that could be regarded as over-reaction considering that it was already known that actual existing home sales for February rose 3.9%. Further M&A activity was highlighted by a $29 billion private equity buy out offer for First Data Corp and Sam Zell's $8.2 billion acquisition of the Tribune Co. Going forward everyone is looking to the earnings season which kicks off next week.
Asian Equities
In a shortened trading week for many Asian markets, falling oil prices and increased hopes for a recovery in the US economy pushed Asian equities higher. It was a quiet week for newsflow, but the Chinese Central Bank increased the reserve requirement for Banks for the sixth time over the last year in an attempt to drain liquidity from the system, following strong growth in the economy.
European Equities
European equity markets headed back to their six year highs as they gained 1.25% over the holiday shortened week. Once again merger and takeover activity and rumour drove stocks firmer. The auto, retail, telecom and utility sectors all saw corporate activity in some of the major names. In addition, whilst there were no major macro statistics out, the decision by the Bank of England to keep interest rates on hold also bolstered the markets.
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Ashburton bond and equity comment - 23 Mar 07
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Tuesday, 27 March 2007
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Fund Manager Comment
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Global Currencies & Bonds
No major moves were apparent in the currency markets last week. The notable exception was the yen which sold off across the majors and has undergone a short period of consolidation after its broad based rally of just a couple of weeks back. Gold continued to move higher, helped by a weaker US dollar.
US Equities
The broader indices were all up more than 3%. All S&P sectors finished positively with Energy the strongest performer and Tech the weakest. The most important event by far was the Fed policy statement on Wednesday. The market rallied in advance of the report, in anticipation of a softer, gentler stance on the part of the Fed and then rallied even more after it got exactly that. The Fed dropped the bias towards tightening that had been in previous policy statements. The earnings news was mostly good but had little overall market impact as the focus is now on the upcoming first quarter reports which start in mid-April
Asian Equities
Asian stocks rose on the week led by Japan, which posted the most bullish land price data in over 16 years. This led the buying of domestic Japanese stocks, pushing the Nikkei to its biggest gains since early last year. Elsewhere domestic Chinese rose to a new record high, with strong gains also in Taiwan, Malaysia and India.
European Equities
European markets had a very strong week (up over 4%) and are now only 1.6% off their highs. Continued merger and acquisition speculation drove the Automobiles and Parts sector higher, following rumours that VW will be bought out by Porsche and that DaimlerChrysler will sell Chrysler. The Mining sector was also strong as commodities moved higher. The defensive sectors (Tobacco, Pharmaceuticals and Food Retail) were the laggards, as investors chose to invest in the higher beta areas of the market.
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Fund Name Changes and Closure of AIM
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Thursday, 16 November 2006
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Official Announcement
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Ashburton International Management Limited (AIM) ceased to exist on 9 November 2006 and Ashburton Global Funds Limited became Ashburton Global Funds PCC.
At the same time the three existing AIM Funds (Americas, Asia Pacific and European) were incorporated under Global.
Name changes of existing Equity Funds:
- Ashburton Americas Fund to Americas Equity Fund PC
- Ashburton Asia Pacific Fund to Asia Pacific Equity Fund PC
- Ashburton European Fund to European Equity Fund PC
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Ashburton bond and equity comment - 24 Mar 06
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Tuesday, 28 March 2006
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General Market Analysis
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US bond yields rose steadily over the course of the week. However, weaker than expected new home sales figures released on Friday prompted a short-term rally in the 10 year bond future, forcing yields to fall back near the 4.65% level. In the currency markets, the US dollar bounced after the previous week's decline with the dollar index rising over 1%. The US equity markets generally finished the week where they started, except for the small caps which managed a 1% gain. Recent US producer prices indicate that there will be further upward pressure on future interest rate increases. The Feds decision on interest rates will be seen shortly, but all eyes will be on the statement that accompanies the decision. Japanese equities ended the week higher amidst marginal net buying by foreign investors. Trading volumes, however, continue to be light, even following the release of official land price data showing that property prices are rising in urban areas and the pace of decline is lessening substantially in rural Japan as well. Elsewhere in the region, Korea and Taiwan had a mixed week with uncertainty prevailing in the technology space following Microsoft's delay of its new operating system. Despite selective profit-taking in Hong Kong/China, stocks continued to move higher with the week mostly dominated by results season. Political impasse continued to weigh on Thailand with depressed volumes overall, whilst India and Australia remained the stand-out markets, hitting record highs once again. European markets were up about 1% last week, as a raft of M&A activity added to the impetus of the various markets. European earnings momentum remains strong with upgrades increasing at a healthy rate. France saw a good pick-up in consumer spending on manufactured goods, ending 5 months of decline. De Villepin continues talks with the trade unions regarding youth employment and a general strike looks likely tomorrow.
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Ashburton bond and equity comment - 17 Mar 06
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Wednesday, 22 March 2006
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General Market Analysis
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Bond markets were much stronger last week as US 10 year yields dropped from the 4.8% level down towards 4.65%. In the currency markets, the US dollar was particularly weak as the dollar index fell 2.5% over the week which helped to push the gold price up 4%. In the equity markets, both the Dow and S&P made new 4 year highs and the S&P was also up every day this week. These moves were aided by the core CPI numbers showing that inflation is coming under control, meaning that the Federal reserve may be near the current monetary tightening process. February housing starts were down but still above estimates. This week's economic data left forecasts for Q1 GDP at 4.5%. The earnings calendar was light, with the highlight being the impressive numbers posted by the brokers. Goldman Sachs, Lehman Brothers and Bear Stearns were amongst the names that all had great results within Financials. Japanese equities gained over 1% on the week amidst signs that the end to quantitative easing is not a concern to the market as the economy grew at an annualized 5.4% in the fourth quarter, in which was better than expected. Elsewhere in the region, Asian markets posted positive returns on the week after US government reports on CPI and retail sales eased inflation concerns, boosting speculation that the Federal Reserve will halt interest rate hikes sooner rather than later. Indonesia was the regions best performer, whilst Australia and India both recorded new all-time highs, the latter continuing to benefit from massive liquidity flows. European markets had a strong week (1.4%), following considerable M&A news flow, across a broad number of industries. What was encouraging is the number of cash offerings, as opposed to share offerings, indicating that companies believe that it is currently cheaper to buy capacity rather than building it.
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Ashburton bond and equity comment - 10 Mar 06
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Wednesday, 15 March 2006
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General Market Analysis
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US bond prices dipped lower again last week as yields rose across the board. The yield on 10 year treasuries is now just shy of 4.80% (a level not seen since June 2004). Elsewhere in the currency markets, the euro broke out of the recent trading range against the pound, whilst the US dollar continued to strengthen against most of the majors. On the commodities front, gold tumbled nearly 6% over the week whilst crude oil also slid lower as a build in crude inventories was evidenced. In the US equity markets, the Dow was the only index that made progress. The week started well with the merger announced between AT&T and BellSouth which brought the whole telecoms sector up. However, tech stocks were dragged down after Texas Instruments said they expect to miss sales estimates. On the economic front, Friday's employment numbers beat expectations showing the labour market may be strong enough to support economic growth, however, pending home sales continued to decline and non farm productivity declined for the first time since Q1 2001. The US trade deficit widened to a larger-than-expected $68.5 bn in January, up from a slightly-downward revised $65.1 bn in December. Japanese equities posted a better week following the removal of quantitative easing by the BOJ. The removal of a major cause for uncertainty boosted market sentiment but, generally, foreign investors remain unwilling to commit new money to Japan amidst poor seasonal trends and light volume. Elsewhere in the region, most markets remained lackluster, with the notable exception of India once again, where the Sensex closed on Friday at another new all-time high. Liquidity remains abundant, both domestic and foreign. It was a volatile week in the European markets. The Emerging European indices were sold off, following the unfolding scenario of increasing interest rates. Russia and Turkey fell 7.5% and 8% respectively. The Bank of England, as expected, left rates unchanged.
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Ashburton bond and equity comment - 3 Mar 06
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Friday, 10 March 2006
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General Market Analysis
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The bond markets struggled further last week as US 10 year yields continued to rise and finished trading just shy of the 4.7% level. The US dollar also failed to make any headway and fell against most of the majors. However, the gold price rose further on the back of the weak dollar and on continuing geopolitical concerns in the Middle East. The US equity markets had a mixed week, swinging between positive and negative territory, the tech heavy NASDAQ closed up the highest with a 0.7% gain on the week. Economic news was also varied, fourth quarter real GDP was revised up from 1.1% to 1.6% as expected, but both new and existing home sales were down, adding to fears that the property prices will continue to fall. On the earnings front there were good results from American Eagle, Costco and Talbots, but the broader markets did not react. The big news was a profits warning from Intel on Friday, however they managed to recover most of the day's losses. Japanese equities suffered as both foreign and domestic investors sold positions amidst light volumes. The week ended with much the awaited CPI statistics for January, which showed core CPI (ex-fresh food) was up 0.5% for the month, topping market expectations of 0.4%. This is a key figure as the market is now expecting the BOJ to end its quantitative easing sooner than previously expected. Elsewhere in Asia, India's budget announcement generated some excitement in certain sectors as the government continues its light handed approach and strives to continue to support strong domestic consumption. European markets gave up nearly 1% this week, led lower by the utilities sector (following their strong performance last week). The oil services sector was the best performer last week, following a round of rig fixtures at better than expected levels. Brent Crude increased by 6%, as a result of the heightened supply side risk. The ECB, as expected, raised the base rate by 25bp to 2.5%. However the rhetoric that came was not 'as expected', as Trichet eluded to a need for 'vigilance' with regard to inflation. The market now expects further tightening.
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Ashburton bond and equity comment - 24 Feb 06
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Thursday, 2 March 2006
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General Market Analysis
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Bonds were a little rocky last week as US 10-year yields rose back near the 4.6% level and the UK Gilt future falling almost 1%. An attack on a Saudi oil station and the increased tensions in Nigeria helped to push the oil and gold price up nearly 5% and 1.5% respectively. Elsewhere in the currency markets, the US dollar index remained relatively flat, whilst the yen rallied against most of the majors due to increased speculation that a rise in interest rates in Japan could be likely by the end of the year. Bar the Dow Jones Index, the US equity markets made modest progress last week, despite an uptick in energy prices due to the aforementioned geopolitical concerns in the Middle East and Nigeria. News on the economic front was a little disappointing with inflation proving slightly stronger than expected, and the Fed's comment on this issue also raised the spectre of yet higher rates to come. Another volatile week in Tokyo saw Japanese equities rebound as market sentiment improved on diminished concerns about selling by non-resident investors. Elsewhere in the region, programme buying gave some renewed impetus to Korea as the index resumed an uptrend. In addition, Taiwan continued to be dogged by political uncertainties as rumours circulated that President Chen planned to call for the abolition of the National Unification Council, a body aimed at fostering better cross-strait relations with China. Closer to home, in Europe the markets continued to push higher (+1.5%), reaching year to date highs. M&A activity remains strong, particularly in the utilities sector. Moreover, German IFO figures were particularly bullish, indicating strong business confidence.
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Ashburton bond and equity comment - 17 Feb 06
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Wednesday, 22 February 2006
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General Market Analysis
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The general consensus is that the Federal Reserve will raise rates by another 25bps at the meeting on 28th March after the new Chairman Ben Bernanke gave his inaugural testimony last week. The bond markets did not react too much as US 10 year yields hovered around the 4.60% level. However, the dollar did show some strength and rose against most of the majors. In the US, the equity markets responded positively to Bernanke's testimony and all the major indices closed up on the week. This was also helped in part by falling energy prices and housing starts which jumped 14.5%. Other economic releases included the January core PPI that had grown more than expected, adding to inflation fears. As we are coming towards the tail end of the earnings season with 86% of the S&P having been reported, 64% of companies have beaten expectations against a long-term average of 59%. Japan continued to give up ground, with the Topix recording a 5% fall on the week, despite encouraging macro data as selling by foreigners and domestic individuals intensified. Elsewhere in the region, Korea continued to labour last week, hitting a 3-month low on heavy foreign selling. Hong Kong/China showed a largely positive trend with particular interest in the banking sector as investors looked for stocks with exposure to China. Thailand once more continued to be distracted by clouds on the political horizon, whilst Indonesia benefited from renewed buying of commodity and cement plays, the latter gaining interest as the government plans more infrastructure projects for next year. Contrary to Asia, European markets had a strong week, finishing 1.4% higher. Oil extended its slide on concerns of higher US inventories but rallied towards the end of the week. Q4 German GDP stagnated and Eurozone GDP increased by only 0.3% (this is against a Q3 increase of 0.6%). Bird flu landed in Italy, France and Germany which started to cause concern.
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Ashburton bond and equity comment - 10 Feb 06
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Wednesday, 15 February 2006
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General Market Analysis
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US 10 year yields climbed higher last week, nearing the 4.60% level. This was partly due to investor uncertainty as to whether the Federal Reserve might continue to raise short term rates for longer than expected. This also helped the US dollar to rally against most of the major currencies and also saw gold fall nearly 5% on the week. Additional economic news was light on the ground, however, the US trade deficit widened further to $65.7 billion. The US indices had mixed fortunes on the back of the aforementioned interest rate concerns: whilst the Dow made some progress, the S&P finished the week practically unchanged. On the earnings front, technology bellwether Cisco Systems beat expectations and gave its first positive outlook for several quarters, whilst further good news was heard from Disney and Pepsi. In Asia, after two positive weekly performances, Japanese equity markets closed lower on the week in the wake of falling overseas markets. In addition, rumours that the BOJ is soon to end quantitative easing spooked the markets. Korea continued to give back some of last year's gains with the banking sector particularly weak after an unexpected rise in interest rates, whilst exporters also suffered over fears the won would keep on appreciating. European markets finished the week slightly higher, led by the defensive sectors (Gas, Water and Utilities). France showed improving GDP (1.4% in 2005) but Germany saw industrial production and orders declining.
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Ashburton bond and equity comment - 3 Feb 06
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Tuesday, 7 February 2006
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General Market Analysis
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Bonds were relatively flat on the week whilst the US dollar climbed higher against most of the majors. Elsewhere, it was a poor week in the US equity markets with all the major indices down over 1%. The Federal Reserve raised interest rates by 0.25% to 4.5% but this was largely discounted. There was a change in the statement wording, giving them scope to stop raising rates soon. However, since their meeting, the unemployment figures for December were down from an expected 4.9% to 4.7%, January earnings were up 0.4% (giving rise to inflation worries) thereby increasing the likelihood that the Fed may continue to raise rates. On the earnings front, there was a big disappointment from Google after missing earnings expectations but the main concern was the outlook. The share price dropped 12% on the week. Japanese equities posted another positive performance on the week, as market jitters from the recent sell-off appear to have been overcome. Steadily improving employment-related economic data and positive industrial production figures aided sentiment, in the face of falling overseas markets. Elsewhere in the region, a shortened holiday week for most markets resulted in little economic or corporate news. Korea continued to sell-off as investors locked in profits, whilst Hong Kong/China was mixed as concern over indications that US interest rates are set to rise further outweighed the announcement of several deals with local companies. European Markets drifted lower this week. German retail sales were weaker than expected and unemployment rose slightly from its December level (11.2% to 11.3%). Oil eased slightly after its attempt a fortnight ago at breaking the $70 level. However, a worsening of the Iranian situation could see it revisit the highs.
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Ashburton bond and equity comment - 27 Jan 06
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Wednesday, 1 February 2006
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General Market Analysis
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Bonds saw a period of consolidation last week as US 10 year yields rose above the 4.50% level. Elsewhere, the currency markets were dominated by the strength of the US dollar which rallied against most of the majors, climbing nearly 3% versus the yen. In the equity markets, the S&P managed to regain most of the losses from last week, despite a relatively mixed earnings picture. Almost half of the S&P have reported; 63% of companies have surpassed expectations, compared to 66% in the previous quarter, but above the long-term average of 59%. Full year earnings are looking at coming in at 13%. The GDP figures were also released, the economy grew at an annual rate of 1.1% in Q4 vs 4.1% in Q3, this was below expectations but largely due to the drop in spending on durable goods. This week, the Federal Reserve meets to discuss the base rate. The general consensus is that they will raise rates by 25bps to 4.5%. In another volatile week in Tokyo, Japanese equities finished strongly as investor confidence returned in response to rising overseas markets and a fall in the yen. In addition, corporate earnings continue to improve and bargain hunters were busy buying stocks that had been sold-off heavily last week. Elsewhere in the region, many markets were impacted by the beginning of Chinese New Year, whilst rising commodity markets pushed Australia to a new all-time high on Friday. The European equity markets rebounded strongly, offsetting last week's drop. There were strong IFO (business confidence) figures out from Germany, which were further backed up by strong consumer confidence numbers. A robust, broad set of corporate results added to speculation that European equities would have a strong first 6 months to the year. Markets broke out, making new highs as good volume further underlined the favourable market technicals.
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Ashburton Latest Ashburton Investment View -Jan 06
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Monday, 30 January 2006
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General Market Analysis
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Core View
No big inflation threat
Until recently, we had been a little unsure about the inflation outlook. Whilst recognising the positive influence of technology, globalisation and the industrialisation of China and India, we were unsure as to what impact rising commodity prices and America's ultra-low interest policy would have on consumer prices. The rampant gold price merely added to the uncertainty. Three years into the recovery, we have come to the following conclusions: (1) with US core inflation (excluding food and energy prices) now lower than it was at the start of the recovery, it is becoming clear exactly how powerful the anti-inflation forces are within the global economy; (2) with the US economy expected to slow in 2006, the point of maximum risk has passed anyway; (3) the rise in gold is a reflection of liquidity and low interest rates rather than inflation. The bottom line is that the short and long-term outlook for inflation is pretty benign.
Last modified: 05 January 2006
The parting of the ways
In September, we said that stockmarkets in Asia and the West may be about to go their separate ways given that the preconditions that we were looking for (an end to deflation in Japan and a stronger Chinese currency) were finally falling into place. Thus far, although Japan has significantly outpaced most other markets, there has been very little evidence of a parting of the ways. Why? One reason is the fact that the Chinese currency revaluation has thus far been very small. Another reason is the way in which rising risk appetite and zero interest rates have seen an outflow of money from Japan in search of higher yields abroad. In other words, economic recovery in Japan has helped to cap bond yields and support equity markets in the West. This is likely to change if either share prices correct in Japan (leading to a loss of risk appetite) and/or interest rates rise.
Last modified: 05 January 2006
Slower economic growth in 2006
The consensus forecast is for the global economy to maintain its solid 4%+ growth rate of 2005 into 2006. We are more pessimistic, expecting a mid-cycle slowdown led by the US consumer based on peaking property prices, high fuel costs and the lagged impact of higher interest rates.
Last modified: 05 January 2006
Equities may not be as cheap as they appear
Our valuation models are currently telling us that Western equity markets are pretty cheap by historical standards. However, there are two major caveats. Firstly, when our models say that equities are cheap, what they essentially mean is that equities are cheap relative to bonds and the level of corporate profits. Given that bonds are not particularly cheap, that may not count for much. Secondly, company profits are currently well above their long-term trend, thus indicating that we may be close to the top of the current cycle.
Last modified: 05 January 2006
Geographical Picture
US rates still heading higher (for now)
The chances are that the Fed will continue to hike rates for the time being. Not only are rates still low relative to nominal GDP growth and inflation, but also Greenspan has expressed concerns about the bubble in property prices. The only thing that would stay his hand now would be a significant correction in bond prices, share prices and/or the property market.
Last modified: 14 November 2005
The economic outlook for China (and the rest of Asia) is set fair
The consensus view for China is still relatively negative, with growth projected to slow to 6-7% in 2006. It is hard to see why. Sure, some of the red hot parts of the economy have been successfully reined in (Shanghai property prices are down around 20%), but inflation is low, money supply growth is accelerating and the authorities are keen to do what they can to promote consumption. Furthermore, commodity prices are expected to correct in the next few months, thereby reducing the cost of developing the Chinese economy. The bottom line is that China's high growth rate should continue into 2006, which is good news for the region as a whole.
Last modified: 14 November 2005
Europe enters the end game
For many and varied reasons, Europe is an under-achiever. Economic reform is required at almost every level. The 'no' vote in the May French EU constitution referendum was encouraging in that it indicated that voters are finally getting fed up with high unemployment and low growth. However (disappointingly) many voted no at the time because they want more socialism, not less. In the recent German national election the CDU-CSU party failed to gain a clear majority despite (or maybe because of) its pro-reform policies. The bottom line is that change is in the air, but things will probably need to get worse before they finally get better.
Last modified: 22 September 2005
6 - 12 Month Market Outlook
US dollar: short-term uncertainty
Our view for the US dollar in 2006 is negative (see Focus on value and trade). However, the short-term outlook is less clear. On the plus side for the dollar, interest rates will probably rise further before they plateau. On the other hand, interest rates are bottoming elsewhere and the US trade deficit has recently widened. For choice, we feel that the dollar has peaked versus the euro and yen, but its downside may be limited in the near term.
Last modified: 09 January 2006
Wary of equities
It's our belief that Western stockmarkets are stuck in a range. What's more, if history is any guide, this cyclical bull market is rather long in the tooth and most markets have achieved the target levels that we outlined in 2003. Earnings have risen considerably, but this has been driven to a greater extent by the US 'bubble' economy (rising property prices etc), which is starting to look vulnerable, particularly in the face of high fuel prices and rising interest rates. Japan looks a better prospect for 2006, but it is now so overbought that some sort of short-term correction cannot be ruled out.
Last modified: 05 January 2006
2006: a better year for bonds?
Bonds struggled to beat cash in 2005. Although they're still slightly expensive according to our models, if economic growth slows, they could be in for a better year in 2006. A couple of caveats: (1) the flow of Japanese money into Western bonds could dry up abruptly if either the Nikkei were to correct and/or stockmarket volatility picks up (see note entitled: The parting of the ways) and (2) we're not convinced that the Fed is quite as close to the end of its tightening cycle as many now seem to think.
Last modified: 05 January 2006
Preferences - Equities
Mind your eye on Europe
European equities have outperformed Wall Street by a large margin since the 2003 low. Initially, their outperformance was gradual, as the positives (cheap and oversold) were partially offset by the negative of a strong euro. However, last year, their relative performance went into overdrive as US shares struggled (due to rising interest rates), the euro weakened and rising exports produced an upturn in the European economy. Looking ahead, it is more likely that Europe will underperform as these positives increasingly turn into negatives: interest rates have already bottomed, the euro has started to bounce and the global economy is set to slow.
Last modified: 05 January 2006
Japan: new bull market
There is little doubt that the Japanese equity market is now well into a new bull market driven by corporate restructuring, the China story, a banking sector on the mend, economic reform and, crucially, very low interest rates. However, share prices are not going to rise in a straight line. They have risen a long way in a short period of time and some profit-taking is to be expected. Furthermore, an end to the zero interest rate policy is likely to provide the catalyst for a correction later this year.
Last modified: 05 January 2006
Preferences - Bonds
US Bonds: the best in the West
US bonds underperformed considerably in 2005 as the Federal Reserve raised interest rates to more 'normal' levels. However, this period of underperformance is coming to an end. Although US interest rates probably have further to rise in the current cycle, much of this is already in the price. Furthermore, they offer good relative value and Central Banks elsewhere (e.g. Norway and the Eurozone) are also increasing rates.
Last modified: 05 January 2006
Asian bonds: the best bet?
Asian bonds offer as much if not more value than American bonds, plus they have the advantage of not being reliant on foreign inflows from abroad.
Last modified: 05 January 2006
Preferences - Currencies
Focus on value and trade
If the environment in 2006 is going to be one of slower economic growth, higher volatility, lower stockmarkets, lower commodity prices and a peak in US interest rates, the focus of the currency markets should shift away from yield (the dominant factor on 2005) towards quality (ie solid trade positions) and value.
Last modified: 05 January 2006
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Ashburton bond and equity comment - 20 Jan 06
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Tuesday, 24 January 2006
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General Market Analysis
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The bond markets saw US treasuries rise and fall only to finish the week relatively unchanged as 10 year yields clung to the 4.35% level. Gold was moderately volatile, climbing to new highs for this cycle (just breaching $568 per troy ounce) before consolidating towards the end of the week. The oil price once again pushed higher on the back of geopolitical concerns in the Middle East and Nigeria. Elsewhere in the currency markets, the euro was particularly strong as it climbed higher versus most of the majors. In the equity markets, the US underwent a tough week, the S&P closed down 2%, erasing most of the gains for the year. This was on the back of poor results from the likes of Intel, Yahoo, Motorola and Citigroup. AMD however gave some good figures, having taken some market share from Intel. There was also some positive economic news released this week, industrial production for December was up 0.6%, consumer confidence was up and initial unemployment claims were down. Japanese equity markets suffered one of their worst weeks for many years as stocks were heavily sold-off in the early part of the week before regaining some of the losses, with the Nikkei closing the week nearly 5% lower. Police investigations into a prominent Japanese company initially sparked the sell-off, but the improving underlying fundamentals of the Japanese economy have not changed and it can be argued that the fall appears to reflect an overdue consolidation of the gains seen over the last year. The most notable moves elsewhere in the region were the large gains in China 'B' shares over hopes of a merger with China 'A' shares. European markets had a sharp sell-off last week, eradicating year to date gains. Oil jumped higher, following the aforementioned geopolitical worries. Consequently, the only sector that finished higher was energy. Volatility edged higher, reflecting the heightened geo-political risks being seen around the world.
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Ashburton bond and equity comment - 13 Jan 06
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Tuesday, 17 January 2006
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General Market Analysis
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After rising during the first half of the week, US 10 year yields saw a sharp reversal on Friday after core PPI figures showed only a marginal increase in December. The currency markets were relatively flat whilst gold continued to advance further and breached the $555 level. In the equity markets, the Dow pushed above the 11,000 mark for the first time in four years but ended unchanged on the week. Economic news was light, the November trade balance figures were published and the gap narrowed by $2 billion more than expected. The most positive news came out on Friday when the core PPI was up only 0.1%. This was the fifth straight gain of 0.1% or less, a sign that high energy prices and a strong economy have not lead to broader inflationary pressures. Japanese equities ended the week at new 5 year highs following volatile trading. Smaller and mid-cap stocks continue their recent outperformance, whilst interest was again focused on the real estate plays after a sell-off. Although now lagging the rest of the region year-to-date, Korea continued its upward trajectory last week. Fourth quarter results from Samsung Electronics were below consensus but positive guidance for 2006 led to market upgrades. Hong Kong/China remained the focus within the region as surging liquidity and strength in retail counters pushed the market higher. Elsewhere, Thailand suffered from a bout of profit-taking whilst Malaysia traded sideways, despite a pick-up in volume. Following the sharp gains of the first week's trading, European equity markets came back to earth as earnings in several sectors disappointed. Telecoms fell sharply following a profits warning and a gloomy outlook statement from France Telecom. Retailers also disappointed, with HMV in the UK and French food retailer Carrefour both having poor figures. A number of financials, particularly insurers, also fell as investors questioned if the strong start to the year could be maintained.
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Ashburton bond and equity comment - 6 Jan 06
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Wednesday, 11 January 2006
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General Market Analysis
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Bonds had a relatively flat start to the year as US 10 year yields traded sideways between 4.35% and 4.40% last week. The currency markets, however, displayed some considerable volatility after weaker than expected new job figures were released in the US. This caused the dollar to weaken against most of the majors, in particular the yen, falling over 3.5% on the week. The flagging dollar also buoyed the gold price further which climbed above $540 per troy ounce. Elsewhere, the first week of the year in the US equity markets was a bumper week with the S&P rising just shy of 3%. This is equal to the return for the whole of last year and has taken the index to a multi year high. The move was partly due to the Federal Reserve releasing the minutes of their last meeting, implying that they were less worried about inflation and that there may not be too many rises to come. Last week also saw a rally in tech stocks with tech-heavy NASDAQ rising over 4.5%. This has been helped by the consumer electronic show in Las Vegas. The coming week also sees the start of the 4th quarter earnings season with Alcoa kicking things off. Bulls stampeded into Asia in the first week of 2006 as strong liquidity drove every market higher, led by Korea and Taiwan. Expectations that US interest rates would peak out earlier than expected resulted in a positive backdrop for exporters, whilst macro and corporate news was generally upbeat. The real focus was China as the local press intimated that another revaluation was imminent and possibly at higher levels than previously thought. Banks, property and insurance counters all found renewed favour. Thailand, a major laggard of last year, continued its recent gains on the back of strong volumes as investors returned to liquid blue chip stocks feeling that much of the bad news has already been discounted. European equities continued in the same vein as last year with the FTSE Eurofirst 300 reaching a fresh four and a half year high as it gained 2.4% on the week. As well as the normal culprits of energy and basic materials leading the way, the strong performance of the NASDAQ helped the chipmakers rally.
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Ashburton bond and equity comment - 30 Dec 2005
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Monday, 9 January 2006
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General Market Analysis
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The bond markets saw light volume trading over the shortened Christmas week and were relatively flat as US 10 year yields hovered around the 4.35% level. The gold price continued to push high once more and rose just over 2% in 3 days nearing USD520 per ounce. In the currency markets, the US dollar had a strong intraday rally at the start of the week against most of the majors which pushed the dollar index up over 1% by the end of the week. The final week of 2005 saw very little market action and the US indices closed lower, capping a lacklustre year overall. On the year the Dow Jones lost -0.61%, whilst the S & P and Nasdaq have managed to eke out modest gains of just +3.00% and +1.37% respectively. Energy stocks and the utilities' sector managed to show good performance this year, whilst telecoms and consumer stocks left investors nursing some serious losses. Of rising concern to equity investors has been the inversion of the yield curve with 2-year issues now yielding more than the 10-year bond, which has often been seen as an indicator of some form of economic slowdown. Japanese equities closed higher in a shortened holiday week following a bullish survey from company presidents who expect the economy to continuing growing in 2006. Elsewhere in the region, Korea ended the year in spectacular fashion and continued to hit new highs. Samsung Electronics led technology companies higher after talks with Sony to negotiate more NAND Flash contracts. Taiwan continued its year-end rally after corporate news intimated that tech order books looked strong for the early part of 2006, whilst Hong Kong saw increased interest in China plays with particular focus on the financial and insurance sector. Thailand and Indonesia fared better with evidence that foreigners were returning to liquid blue chip counters with particular emphasis on financials in both countries. Following a shortened week, European markets did not move significantly. The price of oil moved higher creating a strong move in the energy sector. There is currently a large dispute between the Ukraine and Russia, regarding the supply of natural gas to the Ukraine. This may highlight the risk of over reliance on Russian supply.
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Ashburton Strategy note - 19 December 2005
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Tuesday, 27 December 2005
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General Market Analysis
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Misplaced optimism?
During the last few weeks bonds and equities have rallied as investors have become increasingly relaxed about the long-term prospects for US inflation and interest rates. A significant drop in the oil price (currently 17% below its 2005 high) and some soothing words from the Fed have helped enormously in this regard. Could it really be that simple? Are interest rates about to peak any day?
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Ashburton Strategy note - 16 December 2005
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Tuesday, 27 December 2005
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General Market Analysis
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The impact of zero interest rates (part II)
Our last strategy note focused on three main issues: (1) the global impact of Japan’s zero interest rate policy, (2) the possibility of a significant rally in the yen and (3) the risk that such a development would present to the financial markets. That note was written on Tuesday and distributed yesterday. Much has happened in the short time that has elapsed since.
The dollar was just below ¥121 on Monday morning, was ¥119 yesterday and stands at ¥116 today. Equity investors have been unsettled by this volatility and the Nikkei has dropped 4% from its recent peak. In light of these developments, we have decided to take a little more risk off the table and have reduced our Japan equity exposure (by selling index futures) as summarised in the table below:
Japan Equity Exposure
Was Now
Asset Management Funds 14 7
APS (Low Risk) 10 5
APS (Medium Risk) 17 8
APS (High Risk) 25 13
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Ashburton Strategy note - 13 December 2005
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Monday, 19 December 2005
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General Market Analysis
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The impact of zero interest rates
In the past few weeks we have been trying to reconcile the continued weakness of the yen with the surging Nikkei. Why is it so weak despite the fact that foreign investors are pouring money into the Japanese stockmarket? Finally we think we have the answer.
“You can lead a horse to water, but you can’t make it drink” or so the saying goes. The Bank of Japan slashed its interest rates to zero in 1999 and (apart from a brief period in 2000-1) has kept them there ever since. For a long time its efforts to stimulate the economy were thwarted by the reluctance of individuals to borrow money at any price. After a decade of falling prices and anaemic economic growth, it’s not too hard to see why that should be the case.
More recently, reassured by better economic news, Japanese investors and borrowers have seemingly rediscovered their appetite for risk. Some of their money has found its way into the stockmarket and some has flowed abroad in search of higher income returns. Meanwhile, hedge funds have seized the opportunity to borrow virtually free money in a depreciating currency, which they have subsequently invested. Not only do these developments explain the weak yen but they also go someway to explaining the resilience of Western bond markets and the recent rallies in equities, gold and a broad range of other assets.
In other words, the Japanese zero interest rate policy and associated yen ‘carry’ trade (where investors borrow at low Japanese rates and invest in higher rates elsewhere) are two of the most crucial factors in the financial markets today.
The question is: what happens next? In a nutshell, we believe that the next period is likely to be one of huge opportunity and risk. Markets could shoot higher on a wave of borrowed yen, only to reverse sharply when ‘carry’ trades are unwound. What could bring about a top in markets? There are essentially four things to watch: interest rates in Japan, interest rates elsewhere, market volatility and investor positioning.
If interest rates were to bottom in Japan (unlikely in the near-term) or peak elsewhere (also pretty unlikely), Japanese money would have less incentive to flow abroad. If the market environment were to become less stable, Japanese investors would be less inclined to take risks and investment flows abroad would dry up. But why should market volatility increase? The oil price has started to rise once more and could well prove to be a destabilising factor. However, possibly the most likely cause of problems is the fourth and final factor: investor positioning. We all know that markets usually peak when the final bear throws in the towel. How close are we to this point? It’s hard to say but it is pretty clear there an awful lot of people that are currently ‘long’ the Nikkei and ‘short’ the yen.
Our best ‘top-down’ decision this year has been to own Japanese equities. Our worst decision was to buy the yen. Although we remain optimistic with regard to the outlook of Asian currencies generally, it has become clear that Japan’s significant fiscal deficit is a major obstacle to major yen strength. In short, Japan needs an undervalued yen to ensure a strong economy backdrop and a healthy inflow of taxes into the Government coffers. But exactly how undervalued does it have to be? The yen is now cheaper (versus the dollar) than it was in July 1998 and almost as cheap as it was in March 1985 – both proved to be major turning points for the Japanese currency.
The bottom line is that whilst we recognise the upside potential for equity markets in the very near term, we are nervous of what may lie beyond. We are therefore inclined to take more risk off the table into strength. In that vane, we have recently decided to sell our exposure to gold shares, which have risen very strongly in recent weeks. At this stage our inclination is to buy them back in the event of a 10-15% correction.
On the currency front, we are becoming increasingly confident that the US dollar has seen its best levels for the time being. Although US interest rates are still heading higher, they are now also rising in Europe and much of Asia. As a result, we have recently switched out of the Singapore dollar (which has performed roughly in line with the strong US dollar) into the Norwegian krona, which is now the second most oversold currency on our model and also has the distinction of being a petro-currency (as mentioned above, the oil price has recently turned higher).
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Ashburton bond and equity comment - 25 Nov 2005
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Tuesday, 29 November 2005
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General Market Analysis
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The bond markets stayed in a tight sideways trading range last week after their recent rally and finished the week relatively unchanged. The dollar also remained fairly flat on the week, whilst the gold price continued its advance and rose a further 2%, nearing the $500 level. There was no holding back the US equity markets during the shortened holiday week as the S&P and Nasdaq recorded new highs for the year, and are now heading for one of the best monthly returns in two years. Energy stocks were in demand due to adverse weather reports hinting at colder weather to come, whilst financials were buoyed by the FOMC's minutes, reporting that there was some concern that monetary policy may be tightened too far and, therefore, an end to further rate hikes may well be in sight. Investors also pinned their hopes on a bumper Thanksgiving sales season, although as yet it is too early to report whether this optimism is justified. Japanese equity markets continued their advance last week with the Nikkei closing at a new 4 year high after gaining for 7 straight days. Technology stocks led the market for the second week running, helped by the weak yen and rises in overseas markets. Elsewhere in the region, Korea posted another new all time high, with the closely correlated Indian market also looking to test new highs. Taiwan also rallied, and as a huge laggard to the other North Asian markets looks particularly attractive. The European bourses hit 3½ year highs, despite a slightly disappointing IFO figure and Trichet talking up an interest rate hike. Furthermore, the FTSE Eurofirst 300 rose 1.4% led by strong corporate results and gains in the utilities and the heavyweight oil sector.
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Ashburton bond and equity comment - 18 Nov 2005
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Wednesday, 23 November 2005
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General Market Analysis
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Bonds continued to advance last week as US 10-year yields dipped near the 4.45% level. The recent rally in gold was also sustained as the price rose a further 4% last week and touched $490 per troy ounce (a significant resistance level from a charting perspective). In the currency markets, the US dollar also continued to push higher against most of the majors but struggled to make headway versus the euro, which has been particularly strong of late on speculation of the ECB raising interest rates next week. In the equity markets, the S&P finished up over 1% this week, the third week in a row it has closed up over 1%, pushing it to a new multi-year high. This was helped by the economic figures on Wednesday showing that inflation was being kept at bay, while the economy is still expanding. Other economic data saw better than expected retail sales for October, up 0.9% against an expected rise of 0.3%. The markets were also spurred on by the continued drop in oil prices, which have now hit a five-month low. Japanese equities gained strongly on the week with the Nikkei closing the week at its highest level since 2000. Exporters and technology stocks led the market higher and a strong debut from Sumco, Japan's largest public offering of the year, lifted sentiment. Elsewhere in the region, NE Asia continued its positive momentum with Korea continuing to hit record highs. In Europe, the markets finished the week in positive territory, led higher by the globally driven areas (Steel, Oil and Mining). On Friday, Trichet strongly inferred that interest rates would rise in December and was concerned that inflation could pose a problem in the future. The BOE's inflation fears were, on the other hand, eased as the quarterly inflation numbers were considerably below expectations, refuelling expectations of a series of rate cuts. The riots in France finally abated following imposed curfews.
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Ashburton Latest Ashburton Investment View -Nov 05
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Friday, 18 November 2005
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General Market Analysis
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Core View
The threat of inflation
Thanks to increased competition and better economic management, the global system is much more predicated against inflation than it was in the 70's. That said the development of China and India (and associated commodity price inflation) has made life rather more difficult for policy-makers. For instance, should they consider a rise in the oil price to be deflationary (i.e. a tax on growth) or inflationary? Thus far the Fed has managed things pretty well and core inflation has remained remarkably stable. However, they are treading a very fine line and one false step could be costly. Could it be that the sharp rise in the gold price is the first sign that all is not well on the inflation front?
Last modified: 22 September 2005
The parting of the ways
It is our belief that Asian stockmarkets are in the early stages of a long-term bull market and Western stockmarkets are only part way through a long period of sideways range-trading. Clearly, for this to be right, the recent high correlation between the regions' stockmarkets must start to breakdown. The two preconditions that we felt were necessary for this to happen - an end to deflation in Japan and a stronger Chinese currency - are both starting to happen. Could this be the point where the two regions part company?
Last modified: 22 September 2005
Equities may not be as cheap as they appear
Our valuations models are currently telling us that Western equity markets are pretty cheap by historical standards. However, there are two major caveats. Firstly, when our models say that equities are cheap what they essentially mean is that equities are cheap relative to bonds. Given that bonds are expensive, that may not count for much. Secondly, company profits are currently well above their long-term trend, thus indicating that we may be close to the top of the current cycle. Were bond yields to rise and profits were to fall, equities could well prove to be more vulnerable than our models are currently suggesting.
Last modified: 22 September 2005
Geographical Picture
US rates still heading higher (for now)
The chances are that the Fed will continue to hike rates for the time being. Not only are rates still low relative to nominal GDP growth and inflation, but also Greenspan has expressed concerns about the bubble in property prices. The only thing that would stay his hand now would be a significant correction in bond prices, share prices and/or the property market.
Last modified: 14 November 2005
The economic outlook for China (and the rest of Asia) is set fair
The consensus view for China is still relatively negative, with growth projected to slow to 6-7% in 2006. It is hard to see why. Sure, some of the red hot parts of the economy have been successfully reined in (Shanghai property prices are down around 20%), but inflation is low, money supply growth is accelerating and the authorities are keen to do what they can to promote consumption. Furthermore, commodity prices are expected to correct in the next few months, thereby reducing the cost of developing the Chinese economy. The bottom line is that China's high growth rate should continue into 2006, which is good news for the region as a whole.
Last modified: 14 November 2005
Europe enters the end game
For many and varied reasons, Europe is an under-achiever. Economic reform is required at almost every level. The 'no' vote in the May French EU constitution referendum was encouraging in that it indicated that voters are finally getting fed up with high unemployment and low growth. However (disappointingly) many voted no at the time because they want more socialism, not less. In the recent German national election the CDU-CSU party failed to gain a clear majority despite (or maybe because of) its pro-reform policies. The bottom line is that change is in the air, but things will probably need to get worse before they finally get better.
Last modified: 22 September 2005
6 - 12 Month Market Outlook
The dollar recovery is long in the tooth
The dollar has been in recovery mode since the New Year. Having been rabidly negative last December, the consensus view is now positive on the dollar (although not extremely so). Having been massively oversold, the dollar is now technically overbought (although, again, not extremely so). US interest rates are set to rise further, but we think that all the good news on this front is pretty much in the price. The bottom-line is that the dollar recovery is on its last legs. However, some patience may be called for. Equities are experiencing their traditional pre-Christmas rally and until it is complete, it is hard to see much downside for the dollar.
Last modified: 14 November 2005
Wary of equities
It's our belief that Western stockmarkets are stuck in a range. What's more, if history is any guide, this cyclical bull market is rather long in the tooth and most markets have achieved the target levels that we outlined in 2003. Earnings have risen considerably, but this has been driven to a greater extent by the US 'bubble' economy (rising property prices etc), which is starting to look vulnerable, particularly in the face of high oil prices. Japan offers better long-term prospects, but is overbought and will likely correct with its Western equivalents.
Last modified: 14 November 2005
A bond rally is at hand
Bonds are still slightly expensive according to our models. However, with Asia and oil-producers still channeling their savings into the West, this may be sustainable for some time to come. Furthermore, with the global economy expected to slow, bonds could well be on the verge of a meaningful recovery.
Last modified: 14 November 2005
Breakout for gold
Having broken above several key technical resistance levels the price of gold has surged. Gold has already achieved our minimum price objective ($470) and is starting to look overbought. However, the technical picture looks excellent and subject to short-term corrections, higher levels beckon.
Last modified: 22 September 2005
Preferences - Equities
Mind your eye on Europe
European equities have outperformed Wall Street by a large margin since the 2003 low. Initially their outperformance was gradual, as the positives (cheap and oversold) were partially offset by the negative of a strong euro. However, between January and October 2005, their relative performance went into overdrive as Wall Street struggled (due to rising interest rates), the euro weakened and rising exports produced a meagre upturn in the European economy. Looking ahead, it is more likely that Europe will underperform as these positives turn into negatives: the ECB is flagging the possibility of higher rates, the euro is expected to bounce and the global economy is set to slow. Indeed, this pattern of sharp European outperformance into a stockmarket peak and sharp underperformance thereafter has been the shape of pretty much every cycle in the past decade.
Last modified: 14 November 2005
Japan: new bull market?
Having been disappointing for several months, the Japanese stockmarket has recently made up for lost time, rising over 20% since its low in May. The catalyst for the most recent surge in share prices was the national election, which returned Prime Minister Koizumi to power with a mandate reform. However, it is clear that investors are finally waking up to the significant improvement that has taken place in the economic health of Japan. Although bullish sentiment and overbought conditions point to a possible short-term correction, the long-term picture looks better than ever.
Last modified: 22 September 2005
Preferences - Bonds
US Bonds are the pick of the bunch
US bonds (inflation-linked & fixed income) have underperformed for much of this year as the Federal Reserve has gradually raised interest rates to more 'normal' levels. However, this period of underperformance is now at an end. Although US interest rates probably have further to rise in the current cycle, much of this is already in the price. Furthermore: (a) Central Banks elsewhere (e.g. Japan and Europe) have flagged the possibility of higher rates, (b) US bonds tend to outperform in a rising market (see "A bond rally is at hand") and (c) US bonds offer better value.
Last modified: 14 November 2005
Preferences - Currencies
Focus on value and trade
We believe that the dollar recovery is long in the tooth (see bullet point of the same name). Which currencies stand to benefit the most from a top in the dollar? If the top is accompanied by falling stockmarkets, falling bond yields and rising volatility (i.e. almost the opposite environment to that prevailing in much of 2005), it seems logical that low interest rate, current account surplus currencies will come back into vogue. It also helps that many of these currencies are now incredibly cheap: the real (inflation-adjusted) value of the yen is at the very low end of its historic range versus almost every currency and the Swedish krona is not far behind.
Last modified: 14 November 2005
Asian currencies: best bet in an uncertain world
The US dollar is supported by rising interests, but has the large current account deficit to contend with. The euro is still suffering the ill effects of the German election result. The pound is overvalued and vulnerable to weak economic data. In short, there is little to recommend any of these currencies at present. Hence, despite the uncertainty regarding the timing and extent of the next Chinese currency revaluation, we currently prefer Asian currencies which offer considerably more value than most of their Western counterparts.
Last modified: 22 September 2005
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Ashburton bond and equity comment - 11 Nov 2005
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Tuesday, 15 November 2005
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General Market Analysis
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The bond markets had a strong week, with fixed income securities outperforming their inflation-linked counterparts. US dollar 10-year yields fell from 4.65% at the start of the week to near 4.55% at the close on Friday. Gold was also strong and rose nearly 3% on the week despite the dollar staying in a tight sideways trading range against both the euro and the pound. In the equity markets, Wall Street saw a continuation of its rally as an easing in oil prices and as largely positive earnings buoyed the indices. However, there was some disappointment with technology groups Dell and Cisco Systems' forecasts. The trade deficit recorded yet another record high but the explanation that recent hurricanes had affected spending patterns may have been a fair point, given the impact they had on oil prices and refining capacity. Financial stocks were strong due to signs of increased M&A activity and a successful treasury auction, as were the basic material groups, benefiting from the weaker oil price. After trading in a tight range all week, the Nikkei moved higher on Friday following better than expected 3Q GDP figures, with growth being annualized at 1.7%. Volumes were extremely strong, reaching record levels once again. Elsewhere in the region, the focus remained firmly in North East Asia, where Korea continued its advance aided by record program buying at the end of the week. Consumer confidence and GDP growth figures both bettered expectations, whilst the domestic outlook remained buoyant as major retailers reported good numbers. Sentiment in Hong Kong/China was decidedly directionless with little news to drive the market. European Markets remained stable this week, as indicated by the fall in the VDAX (a volatility indicator). Brent Crude declined, led lower by concerns that the warm weather would hold back demand for heating fuel. French GDP grew by 0.7% and inflation concerns eased, both giving much needed good news to a country that continues to see widespread rioting. The Bank of England left rates unchanged.
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Strategy Note - 7 Nov 2005
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Thursday, 10 November 2005
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General Market Analysis
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Equities
On 21 October we sold our FTSE (UK) and Nikkei (Japan) put option positions (i.e. equity hedges) for Asset Management Funds and Advanced Portfolio Services in the expectation that we would see a short-term rally. Equities have indeed subsequently bounced back. The Japanese equity market has been particularly impressive, with the broadly-based Topix index registering a gain of around 8%. We have used this recovery to buy back our put positions, thereby reducing our equity weighting to more defensive levels. Although we remain optimistic about the long-term outlook for Japan, the market is now so overbought on a technical basis that a 10-15% pullback (albeit in the context of a long-term uptrend for share prices) is quite possible. Given this downside potential, we have also cut the Asia Pacific equity exposure of our traditional portfolio range by 7% to 20%.
Bonds
For much of the summer months, the focus of bond strategy has been US inflation-linked bonds. Although the absolute performance of these instruments has been disappointing, their relative performance has been pretty good, given the rising oil price and consequent rise in headline inflation. The overall performance of bonds has been overshadowed by rising interest rates in America, New Zealand, Thailand, Norway, Canada etc., as well as the prospect of an end to the low interest policies of Japan and the Eurozone. We own bonds in the expectation that rising interest rates will ultimately lead to lower equity market, slower economic growth and (at the very least) a plateau in interest rates. That remains our view. However, timing the low in bond prices was always going to be tricky given that we expected lower bond prices to be the trigger for a top in equities. As bond prices have fallen, so we have switched out of inflation-linked bonds into their fixed income equivalents, on the basis that the relative value has been squeezed out of the former and the latter always tend to perform better in an uptrend.
America led the global interest rate cycle on the way down and is now leading it again on the way up. However, things are stirring in Europe and Japan and their bond markets are starting to look rather shaky. Whatever happens regarding the absolute level of the bond market, we are increasingly confident that the US bond market is set to outperform by a considerable margin.
Currencies
Rising American bond yields has lent further support to the US dollar, which has subsequently risen to new 2005 highs against the yen and the euro. What happens now? It all hangs on the equity markets. When rising interest rates bite sufficiently to produce a loss of investor confidence, so we expect investors to rotate out of the US dollar into safe-haven (read: current account surplus) currencies like the yen, Swiss franc and Swedish krona. Some of our analyst contacts are calling for equities to enjoy their typical year-end rally (before turning down in 2006) and we may therefore need to be patient on this one. On the other hand, the US dollar is now very close to an area of significant technical resistance and to a 20-year high in inflation-adjusted terms versus the yen. Furthermore, there is already evidence of capitulation by the dollar bears, with Warren Buffett recently closing part of his high profile short position in the US dollar.
Peter Lucas, Global Investment Strategist
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Ashburton bond and equity comment - 4 Nov 2005
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Tuesday, 8 November 2005
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General Market Analysis
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Bonds continued to sell-off last week with US 10-year yields rising to 4.68%, a level not seen since March this year. Although the US dollar traded in a tight range throughout the week, gold saw heavy selling and fell over 3.5% to $455 per ounce. In the equity markets, the US indices started November in good form, still celebrating recent higher than expected GDP figures. Added to this was a report showing an improvement in worker productivity and a continuation of the strong earnings season, which is running at +15%. Another 0.25% rate rise by the Fed had been all but priced into the market and whilst the accompanying statement suggested further rises, it was broadly anticipated. Retail stocks had a very strong week as a number of merchandisers' results easily surpassed expectations, reflecting that higher rates and energy prices have had little impact on consumer spending thus far. Japanese equities again posted a strong rise over the week, with the Nikkei finishing at its highest level since May 2001 (above 14,000), amidst record trading value. The banking and real estate sectors were particularly strong, closely followed by selected exporters in the face of a declining yen. Elsewhere in the region, most markets traded on a shortened week due to many public holidays but Hong Kong raised interest rates by 50 bps, higher than expected, which impacted the real estate sector. European stocks performed well last week, finishing the week almost 4% higher. Steel, IT and Oils lead the indices higher. The laggards consisted of the flammables (Forestry, Automobiles and Beverages), as French unrest seemed to hit proportions not witnessed since the student riots in the '60's. Germany came out with unemployment numbers that showed a slight improvement and slightly stronger factory orders. As expected, the ECB left interest rates unchanged at 2%.
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Ashburton bond and equity comment - 28 Oct 2005
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Tuesday, 1 November 2005
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General Market Analysis
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US 10-year yields approached their highest level since March, on concern that quickening inflation will prompt the Fed to lift rates at its two remaining meetings this year. In the currency markets, the dollar continued to weaken against most of the majors whilst gold climbed higher throughout the week touching the $475 level. Elsewhere it was another volatile week for the US equity markets, however the S&P finished in positive territory for the first time this month. This was helped in part by the markets' positive reaction to President Bush announcing Ben Bernanke succeeding Greenspan as the next Federal Reserve chairman. Japanese equities rebounded strongly on the week, before succumbing to a bout of profit-taking on Friday. Japanese companies are in the midst of their first half results season, and whilst expectations are already high, so far, a majority of companies have reported earnings better than consensus forecasts. Elsewhere in the region, most markets sold off as foreign investors reduced their holdings, with the notable exception of Australia, which was marginally up on the week as resource stocks rebounded. European markets had their first positive week this month. However, a mixed bag of earnings meant that it was not a smooth ride. Mid-cap companies appear to be suffering from cost impacts, more than their large cap competitors, who can use their size as leverage when suppliers try to pass on their cost burden. Brent Crude continued back onto its upward track and towards the $59 level. These cost impacts are implicating inflation and some analysts are bringing forward the date that the ECB will raise rates, to the first quarter of 2006.
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Ashburton bond and equity comment - 21 Oct 2005
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Tuesday, 25 October 2005
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General Market Analysis
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The bond markets had a slightly better week as yields were pushed slightly lower. However, the US treasury market is headed for its worst year since 1999, as Federal Reserve officials signal they will raise interest rates to keep near-record fuel prices from causing widespread inflation. In the currency markets the yen continued to strengthen versus the dollar after an adviser to the People's Bank of China said a stronger Chinese currency is "inevitable". Elsewhere in the equity markets, the US indices had a volatile week. This was, in part, due to September's PPI numbers; these came in at 1.9% against an expected 1.2%, adding to inflation fears. This was the largest single movement in 15 years. Energy prices provided some good news this week. The price of oil dropped below $60 a barrel, before just breaking up back to $60.63 for the close. On the earnings front, it was a busy week; Google beat the analyst's expectations, pushing the price up $36 to a new high and resulting in upward revisions of the target price. Japanese equities finished the week slightly lower after a US inflation report added to concern that higher borrowing costs will crimp demand for exported products. Securities, banking and transport equipment issues were the worst performers. Elsewhere in the region, Asia saw a turnaround in the fortunes of every market. Investors began to profit-take in Korea, despite mostly positive macro and corporate news. Taiwan continued to suffer from a continuous decline in the TWD and outflow from technology and financial sectors, with only small cap drug counters resilient, as concerns over avian flu began to engulf the region. October continues to be a lacklustre month for European indices, as they tumbled a further 2.1%. High oil prices and weak demand appears to be causing corporate concern, as reflected in the fact that the UK offered up its highest number of profit warnings since 9/11. The release of poor GDP numbers added to the malaise, showing that the UK economy achieved its slowest annual expansion in 13 years. Both the macro and micro weakness is further compounded by the BOE's reluctance to cut interest rates, due to a concern over inflation.
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Ashburton bond and equity comment - 14 Oct 2005
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Tuesday, 18 October 2005
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General Market Analysis
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The bond markets continued to sell-off last week with UK 10-year government bonds posting their biggest weekly loss since June. The yield on the 10-year gilt reached a two-month high last week after Bank of England Governor, Mervyn King said inflation in the UK will be above the central bank's 2 percent target for a short while. In the currency markets the dollar remained relatively flat against most of the majors, whilst gold corrected and traded slightly lower on the week. In the equity markets the S&P had a bad start to the week, falling on four of the five days, making a recovery on Friday, but still closing down on the week. The minutes of the Feds, 20 September meeting were released showing that they will continue to tighten fiscal policy; this is based on inflation fears following hurricanes Katrina and Rita. With the bulk of earning results due this week this could have a significant impact on the markets. So far announcements have been surpassing expectations, of the 54 members of the S&P who have reported, 65% have topped analysts' estimates. This is above the 10-year average of 59%. Japanese equities started the week in a positive mood, with the Nikkei posting its largest single-day rise of the year to date, as machinery orders far exceeded market expectations. However, investors took profits as the market approached the YTD high posted the previous week. Trading volumes remained high, although intraday volatility increased sharply. Elsewhere in the region, Asian stocks began the week in buoyant mood, after a US jobs report improved the sales outlook for major exporters and consumer confidence in Korea reached the highest level in four months. However, a downbeat forecast on flat-panel prices from LG Philips gave investors an excuse to book profits, whilst raw material producers were sold off as commodity prices slid. Regional news during the week was light, as currency issues and the oil price dominated the headlines. European markets extended their losses, falling over 1%. Commodity focused sectors led the market down. The collapse of Refco, a commodity trading company, that hid $500bn from derivative losses, added to the volatility. Both the ECB and the BOE issued hawkish views on inflation, reducing the chances of any rate move before the end of the year.
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Ashburton bond and equity comment - 7 Oct 2005
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Tuesday, 11 October 2005
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General Market Analysis
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Bonds had a subdued week until Friday when US non-farm payrolls registered only a 35k decline in employment numbers in September versus an expected fall of 150k causing a sharp sell-off in the bond markets. This aided the dollar, which rose against most of the majors during Friday. Elsewhere in the equity markets, Friday's better than expected employment report failed to revive what proved a miserable week for investors. Comments mid-week, from the Federal Reserve Bank of Dallas President, that the Fed was becoming increasingly concerned that inflation was gaining traction, and therefore further interest rate rises were necessary to slow growth, came as a nasty shock to the markets. All major US indices fell sharply on a broad based sell-off as investors locked in profits. The energy sector was hardest hit, falling some 7% on the week, as the oil price eased on fears of reduced global demand. Japanese equities began the week in a positive mood, with the Nikkei making another new four-year high. However, profit-taking emerged during the later part of the week, particularly hitting the domestic sectors that have performed so well over the last few months. Foreigners turned net-sellers whilst domestic investors have started buying, buoyed on by more good economic data showing winter bonuses are the best since 1990. Elsewhere in the region, Korea continued to benefit from positive liquidity flows, and the trend for the most part remained positive as the Bank of Korea upgraded GDP growth. Hong Kong/China sentiment remains overshadowed by the forthcoming heavy-weight listing of China Construction Bank and there was also some profit-taking in retail stocks and selective property counters, ostensibly on fears of higher interest rates. Oil and Mining stocks led the European markets lower (down 7.1% and 6.3% respectively) whilst both the Bank of England and the ECB, unsurprisingly, left rates unchanged (at 4.5 and 2% respectively) although comments from Trichet, regarding his views on inflation, sent the 2-year Euro rate up to 2.5%.
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Ashburton bond and equity comment - 30 Sep 2005
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Tuesday, 4 October 2005
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General Market Analysis
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Bonds had a week of consolidation as US 10-year yields climbed towards the 4.35% level, however, TIPS held up particularly well and continued to out-perform conventionals. In the currency markets the dollar had another strong week and pushed higher against most of the majors. Interestingly, gold continued its recent rally (in light of the strong US dollar) closing just short of the $475 level towards the end of last week. In the equity markets, the US benchmark indices had their first weekly advance in three, which pushed the S&P to just 1.3% from its year high. This was in spite of September's poor consumer confidence report that came in at 86.6 (over 8 points down from expected) the lowest on record for 2 years and the biggest decline in 15 years. This week also saw claims of accounting irregularities at Fannie Mae which sent the shares tumbling to a 52 week low. Japanese equities made further substantial gains last week which helped to push the Nikkei through 13,600 for the first time since May 2001. Market momentum continues to improve, with TSE First Section transaction value exceeding Y2trn for eight straight days, and posting an all-time high on the 29th. The Nikkei gained 1,160 points during September, the largest single-month rise since June 1999. Elsewhere in the Asian region, Indian 1Q GDP came in at 8.1% year-on-year versus 7.2% expected. Domestic liquidity dominated in Korea with the banking sector performing well on the back of S&P upgrades. Singapore and Malaysia continued to tread water on little corporate news, although rig plays made some headway. Despite a lack of liquidity in Indonesia, the mining sector was strong as the market sought haven in $US revenue companies to reduce exposure to a weaker rupiah. European equity markets advanced over the week, led by stronger financial stocks which saw many broker upgrades. The FTSE Eurofirst 300 ended the week up 1.6%, giving a rise of 7.5% on the quarter. The other focus of interest was on the German auto industry. The surprise stake building in VW by Porsche, coupled by the Daimler announcement of massive redundancies, led to large gains on the autos.
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Ashburton bond and equity comment - 23 Sep 2005
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Tuesday, 27 September 2005
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General Market Analysis
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Bonds initially climbed higher during the first half of the week as hurricane Rita in the US dominated the news front. However, after being downgraded to a category three storm later in the week, bonds sold off and finished the week relatively unchanged. In the currency markets the US dollar displayed increasing strength throughout the week against most of the majors. Elsewhere in the equity markets, the three major US indices had one of their worst weeks in over three months. All major indices closed down over 1%, although the oil price fell over 1.4% from the Monday close, partially due to hurricane Rita being downgraded, reducing the risk of damage to the densely populated oil producing Gulf Coast. Following Katrina there were initial thoughts that the Fed may slow the rate of interest rate rises, but stuck to their policy with another 0.25% hike to 3.75% on Tuesday, which lead to some profit taking. Another week and another strong performance was witnessed from Japanese equities. Volumes over the week were the highest on record, as both foreigners and domestic investors bought the market. Over the week the Land Price Survey was released which confirmed the broad recovery in real estate prices across Japan, particularly urban areas. Singapore and Malaysia continued to tread water in the absence of any real catalysts, whilst Indonesia suffered on concern a weaker currency will force further interest rate increases. In Europe, the deadlock in the German Election resulted in potential political paralysis for another four years. A grand coalition is the most likely scenario. Consequently the DAX retreated with the feeling of angst further confirmed by an extremely weak ZEW number.
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Ashburton Latest Ashburton Investment View -Sep 05
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Monday, 26 September 2005
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General Market Analysis
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Core View
The threat of inflation
Thanks to increased competition and better economic management, the global system is much more predicated against inflation than it was in the 70's. That said the development of China and India (and associated commodity price inflation) has made life rather more difficult for policy-makers. For instance, should they consider a rise in the oil price to be deflationary (i.e. a tax on growth) or inflationary? Thus far the Fed has managed things pretty well and core inflation has remained remarkably stable. However, they are treading a very fine line and one false step could be costly. Could it be that the sharp rise in the gold price is the first sign that all is not well on the inflation front?
Last modified: 22 September 2005
The parting of the ways
It is our belief that Asian stockmarkets are in the early stages of a long-term bull market and Western stockmarkets are only part way through a long period of sideways range-trading. Clearly, for this to be right, the recent high correlation between the regions' stockmarkets must start to breakdown. The two preconditions that we felt were necessary for this to happen - an end to deflation in Japan and a stronger Chinese currency - are both starting to happen. Could this be the point where the two regions part company?
Last modified: 22 September 2005
Equities may not be as cheap as they appear
Our valuations models are currently telling us that Western equity markets are pretty cheap by historical standards. However, there are two major caveats. Firstly, when our models say that equities are cheap what they essentially mean is that equities are cheap relative to bonds. Given that bonds are expensive, that may not count for much. Secondly, company profits are currently well above their long-term trend, thus indicating that we may be close to the top of the current cycle. Were bond yields to rise and profits were to fall, equities could well prove to be more vulnerable than our models are currently suggesting.
Last modified: 22 September 2005
Geographical Picture
Europe enters the end game
For many and varied reasons, Europe is an under-achiever. Economic reform is required at almost every level. The 'no' vote in the May French EU constitution referendum was encouraging in that it indicated that voters are finally getting fed up with high unemployment and low growth. However (disappointingly) many voted no at the time because they want more socialism, not less. In the recent German national election the CDU-CSU party failed to gain a clear majority despite (or maybe because of) its pro-reform policies. The bottom line is that change is in the air, but things will probably need to get worse before they finally get better.
Last modified: 22 September 2005
US rates still heading higher (for now)
The chances are that the Fed will continue to hike rates for the time being. Not only are rates still low relative to nominal GDP growth and inflation, but also Greenspan is concerned about the developing bubble in property prices. The only thing that would stay his hand now would be a correction in bond prices and/or the stockmarket.
Last modified: 04 August 2005
The American bubble economy
Alan Greenspan rescued the US economy from the adverse impact of the bursting of the NASDAQ bubble by creating a whole range of other mini-bubbles - bonds, high yield debt, property and the NASDAQ (again). This policy of 'rolling bubbles' will continue so long as inflation remains under control.
Last modified: 15 June 2005
The economic outlook for Asia is set fair
Economic conditions have cooled a little in Asia as China continues to rein in its investment boom. The good news is that the tail off in exports is being balanced to some extent by a gradual pick-up in consumption. Furthermore, low inflation means that the way is clear for the Chinese authorities to provide targeted stimulus for the economy.
Last modified: 15 June 2005
6 - 12 Month Market Outlook
Uncertain outlook for euro-dollar
Back in June the euro was oversold, unloved and overdue for a period of recovery. It duly bounced back versus the US dollar in July and August, peaking just short of $1.26. It has since given back some of its gains (currently $1.22), so the question is, where to from here? The short answer is that we are not sure. Our valuation, sentiment and technical indicators are all pretty neutral. For choice, we prefer the euro (seasonally this time of year is better for the euro and then there's the US current account deficit), but it's not a high conviction position.
Last modified: 22 September 2005
Wary of equities
It's our belief that western stockmarkets are stuck in a range. What's more, if history is any guide, this cyclical bull market is rather long in the tooth and most markets have achieved the target levels that we outlined in 2003. Earnings have risen considerably, but this has been driven to a greater extent by the US 'bubble' economy (rising property prices etc), which is starting to look vulnerable, particularly in the face of high oil prices. Japan offers better long-term prospects, but is overbought and will likely correct with its Western equivalents. Bottom line: we have already hedged our European equity exposure and we may soon need to take action in Japan.
Last modified: 22 September 2005
Bond risks are building
With equities looking increasingly shaky in the face of the soaring oil price, investors are seeking out the safety of bonds. US bond yields have fallen towards the bottom of their recent range and those in Germany are at new historic lows. Could it be that they are jumping out of the frying pan into the fire? Bonds offer little in the way of value and the rising gold price suggests that the outlook for inflation may not be as benign as many presume.
Last modified: 22 September 2005
Breakout for gold
Having broken above several key technical resistance levels the price of gold has surged. Gold has already achieved our minimum price objective ($470) and is starting to look overbought. However, the technical picture looks excellent and subject to short-term corrections, higher levels beckon.
Last modified: 22 September 2005
Preferences - Equities
The parting of the ways
It is our belief that Asian stockmarkets are in the early stages of a long-term bull market and Western stockmarkets are only part way through a long period of sideways range-trading. Clearly, for this to be right, the recent high correlation between the regions' stockmarkets must start to breakdown. The two preconditions that we felt were necessary for this to happen - an end to deflation in Japan and a stronger Chinese currency - are both starting to happen. Furthermore, the technical picture for Japan (in both absolute and relative terms) has improved tremendously and Korea has recently broken to new highs. Could this be the point where the two regions part company?
Last modified: 22 September 2005
Japan: new bull market?
Having been disappointing for several months, the Japanese stockmarket has recently made up for lost time, rising over 20% since its low in May. The catalyst for the most recent surge in share prices was the national election, which returned Prime Minister Koizumi to power with a mandate reform. However, it is clear that investors are finally waking up to the significant improvement that has taken place in the economic health of Japan. Although bullish sentiment and overbought conditions point to a possible short-term correction, the long-term picture looks better than ever.
Last modified: 22 September 2005
Preferences - Bonds
US TIPS: still the best bet
A rising oil price feeds directly into headline inflation, thereby boosting the returns of inflation-linked bonds. Furthermore, the rising gold price may be a sign that inflation is set to become a more deep-seated problem. However, even TIPS look to have limited upside potential and there will soon be a need to move into cash.
Last modified: 22 September 2005
Preferences - Currencies
Asian currencies: best bet in an uncertain world
The US dollar is supported by rising interests, but has the large current account deficit to contend with. The euro is still suffering the ill effects of the German election result. The pound is overvalued and vulnerable to weak economic data. In short, there is little to recommend any of these currencies at present. Hence, despite the uncertainty regarding the timing and extent of the next Chinese currency revaluation, we currently prefer Asian currencies which offer considerably more value than most of their Western counterparts.
Last modified: 22 September 2005
The Swedish krona bounces back
Despite being cheap, oversold and backed by a large current account surplus, the Swedish krona turned out to be one of the weaker currencies in the second quarter. This was due largely to a very low inflation rate and a surprise 0.5% reduction in interest rates. However, with the inflation/interest rate scare largely behind it, the krona is now bouncing back. The krona still looks excellent on our models and remains one of our favourite currencies.
Last modified: 04 August 2005
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Ashburton bond and equity comment - 16 Sep 2005
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Tuesday, 20 September 2005
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General Market Analysis
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US stocks gave up ground this week as the bankruptcy of two of the largest airline companies was announced. Both Delta Airlines and Northwest Airlines finally filed for Chapter 11 protection, and whilst their difficulties have been known for some time it was yet clearer evidence of the impact that higher oil prices is having on industry. Economic data was mixed to weaker, although there was some relief that the consumer price index (excluding energy and food) reflected that inflation is relatively benign, running at a headline rate of 2.1%. Following Koizumi's much better than expected re-election, Japanese equities continued their recent strong run amidst unusually high volume for this time of year. Economic data continues to improve, with annualized GDP coming in at 3.3% against an estimated 1.5%. Elsewhere in the region, Korea continued its liquidity-driven performance to hit new highs, whilst Taiwan suffered from a weaker currency outlook and expectation that the next interest rate move would be upwards. Singapore and Malaysia remained most range-bound, and Thailand paused for breath following recent buying activity. Indonesia remains volatile, with political rather than corporate news driving the market. European equities continued their push higher and finished the week up 0.6%. Once again, leadership came from the more globally driven sectors, including Mining, Steel and Oil. The laggards emanated from the more domestically reliant sectors, namely General Retailers and Food Retailers. The euro continued lower against the dollar, helping the exporters. All eyes appear to be focused on a very close race in the German election.
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Ashburton bond and equity comment - 9 Sep 2005
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Tuesday, 13 September 2005
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General Market Analysis
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US equities enjoyed a better week as investors started to focus on the more positive implications of Hurricane Katrina (a huge Federal aid package for New Orleans and a possible pause in the Fed's tightening cycle). Although construction and steel groups performed particularly well, the ensuing rally was broadly based and was further assisted by an easing in the price of oil towards the end of the week. Japanese equities dipped mid-way through last week on profit-taking ahead of Sunday's general election. However, markets rallied strongly on Friday on record-breaking volume. Economic data continued its largely positive trend - the banking sector announced positive year-on-year growth in total lending for the first time since 1998. Elsewhere in the region, markets were sluggish with the exception of Korea, which hit new highs for most of the week driven by domestic liquidity and increased activity in program trading. European markets continued their run higher, with leadership coming from Technology and Consumer Cyclicals. Economic data was mixed, with French industrial production sharply down and German industrial production showing some improvement. The UK Monetary Policy Committee elected to leave interest rates unchanged.
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Ashburton bond and equity comment - 2 Sep 2005
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Thursday, 8 September 2005
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General Market Analysis
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Despite a deluge of bad news, US indices managed to record gains this week. Although the catastrophe unfolding in New Orleans and its impact on the oil price is obviously bad news for the economy (at least in the near-term), investors drew solace from the rallying bond market and prospects for construction in the South East region. Economic data on the whole has been increasingly disappointing. Europe also shrugged off the higher oil price, with most markets registering gains on the week. France witnessed its second consecutive fall in its jobless number. The ECB maintained the status quo and left interest rates unchanged. The Nikkei also moved higher last week, with foreigners remaining big net buyers. Steel advanced on the back of bullish earnings estimates and the perception that the sector is likely to benefit from the Katrina reconstruction effort. Elsewhere in the region, Hong Kong was the main focus with a number of blue chips reporting positive results and a well-received US dollars2.7bn placement of Petrochina shares. The oil price continued to exert negative pressure on Indonesia and the Rupiah with some talk of contagion spreading to the other SE Asian markets.
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Strategy Note - 5 Sep 2005
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Tuesday, 6 September 2005
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General Market Analysis
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Time to diversify
Our technical indicator has been pretty good at identifying attractive buys and sells, particularly in the currency markets. However, it is not fool proof. Quite often it is a little early. Sometimes it is very early. Take for instance the Swedish krona, which continued to fall in June despite being extremely oversold both in absolute terms and relative to all the other currencies in our model. However, you can only stretch an elastic band so far. The krona eventually bottomed in early July and has been one of the strongest currencies of the past two months. In the past year or so, the model has flagged several attractive buy opportunities (the Australian dollar in June 2004, the pound in August 2004, the US and Canadian dollars in December 2004) that subsequently led to good currency profits. It was early on the krona, but losses have proved to be minimal in the fullness of time. The overall performance of the model has been very satisfactory and it continues to be an integral part of our decision-making process.
Talking of which, following the recent recovery, the model's assessment of the Swedish krona has gone from 'oversold' to 'neutral'. Although we continue to like the krona from a valuation and fundamental perspective, we feel that the case for a large position has diminished. We have therefore decided to switch half of the krona position into the Singapore dollar to increase currency diversification. Our three biggest currency positions (in order of magnitude) are the Japanese yen, the Swedish krona and the Singapore dollar. All three are undervalued and all three are backed by large current account surpluses. It is also important to note that the bias of currency strategy has been shifted towards Asia. With the gasoline price going through the roof, it seems likely that America will apply even greater pressure on China to revalue its currency further. It is hard to see Congress being placated by the 2.2% renminbi revaluation that has taken place since late July.
Peter Lucas
Global Investment Strategist
5 September 2005
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Ashburton bond and equity comment - 26 Aug 2005
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Wednesday, 31 August 2005
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General Market Analysis
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The US equity market continued to slide, with the S & P and Dow both ending the week down over 1% (both indices are now in negative territory for the year as a whole). This was due to hurricane Katrina (and its impact on the oil price), a weak Michigan confidence survey and comments by Alan Greenspan that interest rate policy was increasingly being driven by high asset prices and protectionist policies. All sectors fell with the exception of utilities which were supported by safe haven flows. European stockmarkets had five straight days of decline as the high oil prices continued to worry investors. The FTSE Eurofirst 300 fell by 2.6% on the week, with even the oil majors running into profit-taking despite the oil price action. There was little in the way of economic data, however the German IFO survey confirmed that a general, albeit slow recovery may be underway. Japanese equities continued their recent impressive run of form (the Nikkei touched its highest level since mid-2001), with banking and domestic stocks attracting heavy buying. Elsewhere in the region, Australia hit another new all-time high, led by resources stocks. A higher oil price forced more profit-taking in Taiwan and Korea, particularly in technology issues on expectation of weaker export growth. Hutchison and Cheung Kong both released impressive figures as corporate results dominated the headlines in Hong Kong and China.
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Ashburton bond and equity comment - 19 Aug 2005
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Wednesday, 24 August 2005
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General Market Analysis
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Bonds continued to make steady gains during the week despite higher than expected US inflation figures released mid week. This helped the dollar to rally which gained nearly 1.5% versus the pound on the week. Elsewhere, a difficult week was seen by the US equity markets, and the major indices all gave-up ground. Wal-Mart's comments that the high oil price was impacting sales, and "core" inflation figures at +0.4%, well above analysts expectations of +0.1%, were a disappointment. The Philadelphia manufacturing survey, reflecting that the US economy was still expanding, was largely ignored. The holiday season has also seen a tailing off in trading volumes and this has exacerbated the declines witnessed. As a result, investors lacked any real incentive to drive stocks higher and booked profits following recent strength. Japanese stocks advanced last week amidst heavy foreign buying, pushing the Nikkei to its highest level since 2001. Banks and domestic sectors led the rally, as investors bet that Koizumi will be re-elected with an unprecedented mandate for reform. Taiwan continued its longest losing streak in 10 years as a higher oil price reinforced concerns that the profitability of many exporters would be hit, and Korea suffered further consolidation due to profit taking. Corporate news elsewhere in the region was light. Oil price concerns saw European equities decline for much of the week before rallying strongly on Friday to end broadly flat over the five days. Evidence that the high oil prices were beginning to push up consumer prices intensified fears of a slowdown, which in turn would lead to lower demand for fuel. This resulted in a sharp decline in the oil price on Wednesday and led to the broad market rally towards the end of the week. The best performing sector was telecom were both TDC and O2 came under the spotlight as potential takeover candidates.
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Ashburton bond and equity comment - 12 Aug 2005
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Tuesday, 16 August 2005
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General Market Analysis
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Weaker than expected US retail sales helped push the bond markets back into their previous trading range. TIPS in particular put in a robust performance to end the week higher. In the currency markets, the dollar continued to weaken sharply over the week, falling over 2% versus the pound which helped the gold price to rally further. The Dow and the S&P managed to eke out gains on the week despite a number of negative datapoints. The Federal Reserve raised rates for the tenth straight time to 3.50%, oil prices continued their inexorable rise, whilst the trade deficit, which had been showing some short-term improvement, deteriorated, reflecting a sharp jump in imports and only flat exports. Investors, however, took heart from the Fed's statement that longer-term inflation remained well contained. Technology was a particularly weak market due to subdued revenue forecasts from bellwethers Cisco and Dell, whilst energy issues were well supported. Japanese equities pushed the Nikkei to a new four-year high as Prime Minister Koizumi called a snap September election after losing the vote on Postal Reform. Initial scepticism was short-lived as investors focused on the removal of political uncertainty and a potentially reformist administration. The headline figure in Friday's GDP report was scarcely encouraging (+0.3% growth vs. +0.5% expected), but a look at the components revealed that consumer spending and private non-residential investment were both firm. Elsewhere, most Asian markets were kept in check by rising oil prices and interest rates. However, several good figures from the middle of the 1st half reporting season kept the momentum going in Hong Kong. Korea (led by shipbuilders) also gained on the week, whilst Singapore suffered badly following the stake sale by government controlled Temasek of an 8% stake in market leader Capitaland. European equities resumed their upward momentum, despite rising oil prices and increased expectation that US interest rates will keep rising. However, the gains, much of which were eroded by the end of the week, were mostly in the energy sector. Other sectors were little changed with the exception of banks, as speculation concerning the perennial takeover target Commerzbank once again emerged.
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Ashburton Latest Ashburton Investment View -Aug 05
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Wednesday, 10 August 2005
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General Market Analysis
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Core View
Divergent interest rate trends
In the absence of a financial market shock, interest rates look set to rise further in America. The recent improvement in economic conditions should ensure that the ECB continues to sit on its hands. The UK Monetary Policy Committee has reduced interest rates by 0.25% to 4.5% - their reluctance to reignite the property market will probably mean that it will be a while before they decide to act again.
Last modified: 04 August 2005
The long-term inflation threat in the West
All the risks to inflation are currently skewed to the downside (see "The problem of deficient demand"). However, there are clouds gathering on the far horizon. Deflation is slowly loosening its grip on the Japanese economy. China's economic development is pushing up commodity prices. Asia has started to revalue its currencies. European voters will ultimately force the politicians to promote growth. Demographic trends in the West should mean more power for Trade Unions and more government borrowing. We may well be entering the last stages of the 24-year bond bull market.
Last modified: 04 August 2005
Asia currency revaluations: the story begins
China has finally bowed to pressure from America and revalued its currency. Although only a small move (2%), we view this as being a significant development. After all, there were many out there that insisted that China would never revalue its currency. However, China is reluctant to allow the renminbi to appreciate too quickly, given that (a) they don't want to rock the boat too much and (b) they want to extract maximum political capital from the policy. This means that the upside for Asian currencies may be capped in the near-term and any weakness in the dollar may be channeled through the euro for the time being. We ultimately expect Asian currencies to appreciate substantially versus both the US dollar and the euro.
Last modified: 04 August 2005
The problem of deficient demand
One of the main challenges facing the global economy today is that of deficient demand (i.e. too many goods chasing not enough consumers) in Europe and Asia. This is why inflation has been remarkably well behaved in the face of rising commodity prices and why the weaker dollar has thus far failed to dent the large US current account deficit. The solution is clear. Asia needs stronger currencies and Europe needs economic reform and more official help for the economy (lower interest rates and tax cuts). Both regions should eventually deliver the goods. Indeed, China has recently announced a small revaluation in its currency, the renminbi. Meanwhile, inflation should remain relatively low and stable.
Last modified: 04 August 2005
The bubble roadmap
Having followed the 'bubble roadmap' (based on 1930's Dow Jones, 1980's gold price and 1990's Nikkei) quite closely in 2000-4, the NASDAQ has recently been going up when it should have been going down. Does this mean that our call for a long period of sideways trading has been nullified? We don't think so. The NASDAQ bubble was one of the biggest manias of the past century and we find it hard to believe that bull market conditions can resume without a long period of recuperation. If anything, the fact that it has exceeded expectations just makes us more worried about the near-term outlook.
Last modified: 04 August 2005
Equities remain cheap relative to bonds
Corporate profits have pretty much kept pace with the rise in share prices during the 2003/5 recovery and hence price-earnings multiples (a key equity valuation yardstick) are barely changed since the low in stockmarkets. Meanwhile, global bond prices remain close to multi-decade highs. As a result, despite the post-March 2003 stockmarket recovery, our valuation models very much favour equities over bonds. That means that in the short-term, providing company profits do not fall (our preferred view), equities are unlikely to fall too far and on a 1-2 year view will almost certainly beat bonds.
Last modified: 15 June 2005
Geographical Picture
US rates still heading higher (for now)
The chances are that the Fed will continue to hike rates for the time being. Not only are rates still low relative to nominal GDP growth and inflation, but also Greenspan is concerned about the developing bubble in property prices. The only thing that would stay his hand now would be a correction in bond prices and/or the stockmarket.
Last modified: 04 August 2005
The American bubble economy
Alan Greenspan rescued the US economy from the adverse impact of the bursting of the NASDAQ bubble by creating a whole range of other mini-bubbles - bonds, high yield debt, property and the NASDAQ (again). This policy of 'rolling bubbles' will continue so long as inflation remains under control.
Last modified: 15 June 2005
The economic outlook for Asia is set fair
Economic conditions have cooled a little in Asia as China continues to rein in its investment boom. The good news is that the tail off in exports is being balanced to some extent by a gradual pick-up in consumption. Furthermore, low inflation means that the way is clear for the Chinese authorities to provide targeted stimulus for the economy.
Last modified: 15 June 2005
Europe enters the end game
For many and varied reasons, Europe is an under-achiever. Economic reform is required at almost every level. The recent no vote in the French EU constitution referendum indicates that voters are fed up with high unemployment and low growth. Unfortunately it is not clear what they want to happen - half voted no because they want more socialism and half because they want less. Under such circumstances, French politicians are unlikely to grasp the nettle of reform and will be tempted to 'muddle through'. The bottom line is that change is in the air, but things may need to get worse before they get better.
Last modified: 15 June 2005
6 - 12 Month Market Outlook
Has the dollar recovery run its course?
In December 2004, the dollar was oversold, out of favour and due for a bounce. Better trade numbers provided the window of opportunity for a recovery and rising interest rates provided the impetus. However, the large current account deficit was always likely to mean that this was no more than a period of temporary relief. Despite a continuing flow of good news from the US economy, the dollar recovery has recently run out of steam. Indeed, the euro has now risen above $1.225, a key technical level (the top of the recent range and the four-month downtrend). With rising interest rates well discounted, China dragging its feet on currency revaluation and gold looking better and better, we are increasingly convinced that the dollar has resumed its downtrend versus the euro.
Last modified: 04 August 2005
Wary of Western stockmarkets
Western stockmarkets have recently exceeded our expectations. European markets have been particularly impressive, buoyed by a combination of low interest rates, better economic news and the weaker euro. However, we are loath to chase them higher, because: (a) sentiment remains elevated (b) most markets are now very overbought and (c) the dollar looks to be peaking. Furthermore, there remains a real risk that demand from China will push the oil price through resistance at $60 and on towards the next technical target at around $80.
Last modified: 04 August 2005
Bond risks are building
The Chinese currency revaluation is an ominous development for Western bond markets. However, if Asian central banks are forced to intervene in the currency markets to slow the appreciation in their currencies (i.e. buy dollars which they then park in the US bond market), ironically it may mean that the bond market continues to defy gravity for a while longer. Bottom line: the bond bull market is in its final stages, but we may have to wait a bit longer before the bear trend kicks in.
Last modified: 04 August 2005
Things are looking up for gold
Gold has recently surged with the weaker dollar and looks set to break key resistance at $440. A break here would set the scene for a rally to at least $470 and would be another sign that the US dollar's rally has run its course.
Last modified: 04 August 2005
Preferences - Equities
The parting of the ways?
Our view remains that Asian stockmarkets are in the early stages of a long-term bull market and that Western stockmarkets are merely experiencing a rally within a broad sideways trading range. This means, at some stage, the two regions will have to go their separate ways. There are two factors that we feel could make this happen: Asian currency revaluations and an end to deflation in Japan. It may be early days, but things are starting to move in that direction - China has revalued its currency (albeit only marginally) and property prices are once again rising in the heart of Tokyo. East and West may not be quite ready to go their separate ways just yet, but the writing is definitely on the wall.
Last modified: 04 August 2005
Japan: down but not out
Japan has recently been something of a disappointment. Not only has it fallen in absolute terms, but also it has underperformed other major markets due largely to worries over the health of the economy and anti-Japan demonstrations in China. However, the current concerns regarding the economy are not expected to last and the spat with China is nothing more than a storm in a teacup. What's more, the Nikkei is now close to the low end of its 12-month range, valuations remain compelling and the relative line for bank shares (a key indicator) is holding above key support. We remain positive with regard to the long-term outlook.
Last modified: 22 April 2005
Preferences - Bonds
US TIPS - a good each-way bet
Despite the fact that we expect inflation to remain pretty stable in the months ahead, we like US Treasury Inflation Protected Securities. Not only are they oversold relative to fixed income securities, but they tend to outperform when the dollar falls and commodity prices rise (essentially the scenario we foresee in the near term).
Last modified: 15 June 2005
Preferences - Currencies
Hold onto the euro
In mid-June, we expressed a preference for the euro, describing it as being the 'dog with least fleas'. In the period since, it has bounced back impressively, registering gains versus all the other major currencies. Despite the fact that it remains expensive (particularly versus Asia currencies) we feel that it is still too early to sell the euro (and other European currencies) given China's reluctance to allow its currency to appreciate in the near term. Ultimately we anticipate a big switch into Asian currencies, but it's still too early to make that call.
Last modified: 04 August 2005
The Swedish krona bounces back
Despite being cheap, oversold and backed by a large current account surplus, the Swedish krona turned out to be one of the weaker currencies in the second quarter. This was due largely to a very low inflation rate and a surprise 0.5% reduction in interest rates. However, with the inflation/interest rate scare largely behind it, the krona is now bouncing back. The krona still looks excellent on our models and remains one of our favourite currencies.
Last modified: 04 August 2005
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Ashburton bond and equity comment - 5 Aug 2005
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Wednesday, 10 August 2005
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General Market Analysis
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The bond markets remained relatively flat for most of the week until a significant sell-off was initiated on Friday, as better than expected non-farm payroll figures were released (207k actual vs 180k expected). This pushed US 10 year yields up near the 4.4% level and initially helped the dollar to rally before easing back to end the day relatively unchanged. After hitting 4 year highs mid-week, the S&P and Nasdaq both gave up ground sharply and all the major US indices ended recording losses for the week. Markets were initially buoyed by a continuation of healthy corporate earnings and better than expected economic data in the form of personal spending and factory orders. However, the recent strong run came to an abrupt halt as Thursday's disappointing same store sales and an up-tick in inflation, as evidenced in the latest employment report, gave investors the excuse to take profits ahead of the Federal Reserve's next rate meeting on 9 August. Japanese data continued to be positive, with earnings and land prices surprising to the upside last week. The Nikkei pushed above 12,000, for the first time since early 2004, before succumbing to profit taking over concerns of political instability with the forthcoming Upper House vote on postal reform. The smaller more speculative markets were particularly hard hit, with the Mothers index falling nearly 8% on the week. Elsewhere in the region, the domestic Chinese share indices were particularly strong, after almost halving since early 2004. In contrast, Korean equities saw a sharp reversal, after a recent very strong performance. European markets had their first lower weekly close in a month. The leading areas came from the mining, steel and energy stocks. Iron ore and steel both continued their recovery. The Oil price was strong, following the news of the death of King Fahd and continuing refinery problems. Germany witnessed a rebound in its manufacturing numbers, helped higher by machinery orders. The Bank of England unsurprisingly cut rates by 25 basis points (to 4.5%) and the ECB maintained the status quo by leaving rates at 2%.
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Ashburton bond and equity comment - 29 Jul 2005
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Wednesday, 3 August 2005
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General Market Analysis
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Bond markets were relatively flat for most of the week but dipped lower after Friday's US GDP report showed 2nd quarter real GDP grew at a 3.4% annual rate, slightly weaker than expected but above the long-term historical trend (3.1%). On the currency front, the US dollar rally seen of late, came to a peak as it weakened over 1% versus both the pound and the euro on the week. Elsewhere, US equity markets ended the week little changed after a positive start, as concern the Federal Reserve will keep raising interest rates weighed on excellent earnings reports and positive economic data. The economy 'continued to expand in June', while inflation 'eased slightly or remained unchanged' the Fed commented in its Beige Book regional survey. June existing home sales reached a record level, durable goods orders were much stronger than expected and initial claims for unemployment stayed at very low levels. Of the 375 companies that have reported, over 70% have beaten expectations, the highest since 1st quarter 2004. Japanese equities ended the week in a buoyant mood, with the Nikkei reaching levels last seen in March amidst high volumes. In addition, smaller and more speculative stocks are also being actively purchased by retail investors, with the Jasdaq index reaching levels last seen in 2000. Economic data on the month was largely better than expected, with June's unemployment data particularly strong, falling 0.2% to 4.2%, the lowest level since July 1998. Elsewhere in the region, Korea continued its remarkable rise with the Kospi trading at levels last seen 10 years ago. European markets had another positive week, helped by a raft of positive corporate earnings numbers. Oil prices continued higher and finished the month close to their July highs. The markets were further helped by a good German IFO number, confirming the improvement in economic momentum.
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Ashburton bond and equity comment - 22 Jul 2005
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Wednesday, 27 July 2005
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General Market Analysis
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The bond markets were relatively flat on the week whilst the currency markets were dominated by the surprise revaluation of the Chinese yuan. This helped many Asian currencies to rally, including the yen, which ended the week over 1% higher versus the US dollar. US indices moved higher as the number of companies exceeding earnings expectations continued to rise, whilst Fed Chairman Greenspan suggested that the economy is in a period of 'sustained growth and contained inflation pressures'. Energy companies led the advance as several companies delivered stellar results, whilst a persistently high oil price provided underlying support for the sector. Japanese equities pushed up to 3 month highs before reversing at the end of the week on concerns of the Chinese revaluation of the yuan. Elsewhere, Korean equities continue their recent impressive performance, trading at levels not seen for 10 years. Obviously, the main story was the yuan revaluation but also Malaysia announced a similar move to the Chinese, which is viewed very positively by the market. European markets had another positive week, helped by the revaluation of the Chinese yuan. The FTSE continued higher, unbowed by the threat of terrorism in London. The UK did however issue some weak GDP and retail figures and subsequently minutes from the MPC meeting indicated that an August rate cut in the UK is imminent. Germany, however, provided the market with a bullish industrial outlook (ZEW) number, something that should be further helped by the yuan revaluation.
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Ashburton bond and equity comment - 15 Jul 2005
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Wednesday, 20 July 2005
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General Market Analysis
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Bonds saw a pull back last week with yields rising across most markets. The US five-year auction week was patchy with just under 30% going to indirect bidders. Elsewhere in the currency markets the US dollar fell sharply at the start of the week but regained momentum after better than expected US trade deficit figures were released on Wednesday. In the equity markets, US stocks recorded their third week of gains as several positive earnings reports and encouraging economic data lifted the S&P index to a four-year high. Apple and PepsiCo posted excellent results, whilst McDonalds rallied after saying second quarter results will be better expectations. The company also received a favourable court ruling that cleared the way for the resumption of Canadian cattle shipments to the US, ending a two-year ban. Thomson Financial Data have now revised second quarter S&P earnings expectations to 7.1%. Consumer prices were unchanged in June (+0.2% expected), whilst lower oil prices allayed concerns surging fuel costs would crimp corporate profits. Energy companies were the only industry group to decline, finishing the week down 1.9%. In Japan, the Nikkei rose to a 14 week high as the market received continued support from the strength of the US tech sector and positive comments on the economy from the BOJ Governor. Asia followed in a similar vein with the Hang Seng hitting new 4-year highs lead by property stocks. Despite the high oil price European markets continued their ascent, with most indices making new highs for this year. The continuing threat of production interruptions from various hurricanes meant that Brent crude oil prices remained high. In Euro-land GDP rose 0.5% in the second quarter, this news was accompanied with a comment that the inflation outlook had 'clearly worsened', thereby dampening speculation that the ECB may cut rates.
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Strategy Note - 11 Jul 2005
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Tuesday, 12 July 2005
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General Market Analysis
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Adding to TIPS
On 24 May we switched out of short-dated US fixed income securities into 8-10 year US inflation-linked bonds (TIPS). Thus far TIPS have been rather disappointing. Not only have they underperformed their fixed income equivalents but, also, they have fallen in absolute terms. One of the reasons for their poor performance has been the persistently strong US dollar, which has served to cap inflationary expectations. However, with yields now close to 12-month highs, the case for TIPS is, if anything, even more compelling.
- Many of our trading tools gave premature sell' signals for the US dollar. Nonetheless, we remain convinced that the next move will be down. Indeed, the break of trend by the Canadian dollar versus the US dollar and the sharp rise in euro-sterling (often a leading indicator for euro-dollar) suggest that the top may already be in place. A weaker US dollar would push up inflationary expectations, thereby supporting TIPS.
- Breakeven inflation rates (the yield gap between TIPS and fixed income securities) are significantly below the actual inflation rate and are technically oversold (TIPS outperform when the breakeven inflation rate rises).
As a result, we have decided to increase our exposure to TIPS by 5% to 28% for Asset Management and by 10% to 60% for our various bond-based services.
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Ashburton bond and equity comment - 8 Jul 2005
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Tuesday, 12 July 2005
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General Market Analysis
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The bond markets advanced sharply after Thursday's terrorist attacks in London. The rally was short-lived, however, as equities showed resilience and recovered whilst the bond market eased to finish the week relatively unchanged. The currency markets were once again dominated by the US dollar rally which was aided further as the US unemployment rate dropped to 5%, the lowest since September 2001. Elsewhere, US stocks advanced leaving the S&P unchanged on the year as several positive reports suggested the economy is in decent shape heading into the second half of the year. May factory orders and sales of business equipment increased, alleviating concern over slowing demand. Retailers also gained after posting their best sales growth in more than a year. The markets demonstrated their resilience on Thursday by finishing the day in positive territory despite terrorist attacks in London. With the second quarter earnings season now underway, investor focus has shifted to corporate profits. After a strong start to the week, Japanese equities drifted lower as profit taking emerged following the recent good run. Economic data was mixed, with, on the positive side very strong regular earnings (May was the 2nd straight rise in earnings after 52 consecutive declines) and employment data (5th consecutive rise after 89 consecutive negative readings), counterbalanced with weaker than expected machinery orders. Thursday's tragedy in London overshadowed any trading news in Europe during the week. Markets initially sold off but displayed true resilience as they recovered within a day, and European markets finished the week 0.5% higher. The markets' ability to shrug off this type of contemptible action is encouraging. Both the Bank of England and the ECB left rates unchanged.
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Ashburton bond and equity comment - 1 Jul 2005
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Wednesday, 6 July 2005
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General Market Analysis
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Bonds underwent a period of consolidation last week which saw yields creep higher across most of the global markets. In the currency markets, the US dollar continued its bullish advance and gained over 2% and 3% in the last week versus the euro and pound respectively. In the equity markets a modest rise was seen by Wall Street stocks this week, with little investor participation ahead of the widely predicted 0.25% rise in the Fed Funds rate to 3.25% on Thursday. The accompanying policy statement remained similar to previous meetings and a continuation in rate hikes over the following months seems likely, given that monetary policy remains "accommodative" in the Fed's own words. On the economic front, data reflected an improvement in consumer confidence, a higher than expected positive revision to Q1 GDP, and manufacturing data also confirmed no significant slowdown in the US economy was being seen. After a poor start to the week, Japanese markets staged a strong recovery to push the Nikkei to over 11,600 for the first time since April. On Friday, the markets received a further positive surprise after June's Tankan report was better than expected. The report added further evidence that domestic demand is increasingly driving the economy as opposed to external demand (exports). European markets were stronger last week thanks to a pull back in oil of almost US$3/bbl and a weaker euro. The weak euro helped manufacturing sentiment to improve, witnessed by an upturn in the German IFO and, in turn, a pick up in French and German employment numbers.
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Ashburton bond and equity comment - 24 Jun 2005
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Wednesday, 29 June 2005
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General Market Analysis
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Global bond markets put in a strong performance after last week's sell-off with US 10 year yields falling over 20 basis points. In the currency markets, the US dollar saw choppy trading versus most of the majors but failed to make any headway and finished the week relatively unchanged. Elsewhere in the equity markets, US indices declined on the week as the impact of record oil prices and an unexpected drop in business equipment orders (ex-transportation) raised doubts about the sustainability of corporate profits and economic growth. Whilst on the surface economic data suggested a mixed picture - jobless claims were lower than expected, existing and new home sales were strong - investor sentiment has shifted to a slightly more cautious approach ahead of the 2nd quarter earnings season. A disappointing forecast from Fedex, a leading indicator of industrials, sent transportation stocks lower whilst Ford also cut its 2005 profit forecast for the second time this year. It was a quiet week for Japanese equities, with a generally positive tone helped by overseas investors turning net-buyers again. The major indices traded in a very narrow trading range, awaiting major data from overseas and the Tankan out later this week. Elsewhere in the region, Taiwan pushed up to levels last seen early in 2004, whilst in Hong Kong the Hang Seng index broke out to the upside of a narrow trading range that it has been stuck in since late last year. India continues to push to new all time highs. Despite higher oil prices, European shares managed a slight gain over the week. This was due to interest rate cut hopes, combined with the weak euro, which should bolster corporate earnings. Technology was the strongest sector, though most of the gains were due to company specific news. The weakest sector was steel which struggled on profit warnings and concerns over falling prices and over supply.
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Ashburton bond and equity comment - 17 Jun 2005
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Wednesday, 22 June 2005
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General Market Analysis
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Most major bond markets came under selling pressure last week, particularly in Europe, with German 10 year yields rising over 25 basis points. In the currency markets, the dollar gave up its gains made last week to end the week lower versus most of the majors. Elsewhere in the equity markets, evidence of relatively benign core inflation figures (excluding food and energy), and supportive statements from the Federal Reserve's "Beige Book" regarding manufacturing helped the US indices rally on the week. By contrast, of particular note was strength seen in commodity and energy stocks following rises in base metal prices, a sharp increase in the price of oil on lower than expected inventories and concern that oil refiners may be unable to meet demand later in the year. Consumer stocks were also supported on the back of favourable housing starts, the fastest since February. Japanese equities advanced to their highest level in two months helped by gains in overseas equities and positive data on the real estate and banking sectors. Individual bank deposits in Japan fell in 2004 for the first time on record, hinting at the possibility of an increase in risk appetite. Interest centred on the key banking sector once again, for the first time in many months. Elsewhere in the region, Australia hit another new all time high, led by a resurgence in resources stocks. Both Korea and Taiwan also pushed higher, boosted by heavy buying from local financial institutions. Chinese Industrial Production hit a new record level in May, up 16.6% year-on-year. Gains were particularly strong in the infrastructural and power sectors of the economy. European equities touched fresh 3 year highs and the FTSE100 hit levels last seen in June 2002. This was despite high oil prices, worries about slowing earnings growth and political deadlock with regard to the EU budget. Obviously, the energy sector led the gains but a flurry of corporate activity in the beverage, bank and insurance sectors bolstered momentum.
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Strategy Note - 17 Jun 2005
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Tuesday, 21 June 2005
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General Market Analysis
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Reducing the equity weighting
Back in March we suggested that the second (recovery) phase of the equity bear market was complete and that markets had entered the third (corrective) phase that would last several months and would see many markets revisit their lows of last August. Since then equities have gone down and then up, with many markets now pretty much back where they started. Despite the lack of downside registered thus far, we continue to believe in the correction scenario for two main reasons:
1. The bubble roadmap' for the NASDAQ (based on the main financial manias of the last one hundred years) is still in a vulnerable phase and does not allow for a sustained upturn until later this year.
2. The Federal Reserve is still determined to restore monetary policy to a neutral setting. Unfortunately they are not sure what would constitute a neutral level for interest rates. This means that interest rates will almost certainly continue to rise until the stock market starts to show signs of stress.
Given these concerns we have been looking for an opportunity to (temporarily) reduce our exposure to equities. Today we have started to take action. Despite all the uncertainty generated by the recent French EU constitution referendum, European equities have continued to edge higher and have actually registered new highs for this current cycle. However, our technical analysis work suggests that the rally is probably in its last stages. In addition, we are concerned by evidence of investor complacency (e.g. bullish sentiment and low option volatility) and the likelihood of a euro recovery (bad news for European exporters). We have therefore decided to reduce our exposure to equities in a variety of different ways:
- The International Equity Funds have hedged half of their European equity exposure and all of their UK equity exposure.
- The Asset Management Funds together with the Low and Medium Risk APS services have hedged almost all of their European equity exposure.
- The Higher Risk APS service has introduced a 30% short' position in European equities (to set against the 70% long' position in Asia Pacific).
Peter Lucas, Global Investment Strategist
17 June 2005
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Ashburton Latest Ashburton Investment View -Jun 05
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Monday, 20 June 2005
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General Market Analysis
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Core View
Equities remain cheap relative to bonds
Corporate profits have pretty much kept pace with the rise in share prices during the 2003/5 recovery and hence price-earnings multiples (a key equity valuation yardstick) are barely changed since the low in stockmarkets. Meanwhile, global bond prices remain close to multi-decade highs. As a result, despite the post-March 2003 stockmarket recovery, our valuation models very much favour equities over bonds. That means that in the short-term, providing company profits do not fall (our preferred view), equities are unlikely to fall too far and on a 1-2 year view will almost certainly beat bonds.
Last modified: 15 June 2005
Phase three of the equity bear market
It is our belief that Western equity markets are following the typical post-bubble pattern: a sharp fall followed by a long period of range trading. The first phase began on Wall Street in October 2002 and in Europe during March 2003. The second (recovery) phase was completed on Wall Street in March and is close to completion in Europe. The third phase is expected to last a few months and could even see some Western markets return to their lows of August 2004, implying losses of 10-15%. Our best guess at this early stage is that phase four (the next major rise) will begin later in 2005.
Last modified: 15 June 2005
The problem of deficient demand
One of the main challenges facing the global economy today is that of deficient demand (i.e. too many goods chasing not enough consumers). This is why inflation has been remarkably well behaved in the face of rising commodity prices and why the weaker dollar has thus far failed to dent the large US current account deficit. The solution is clear. Asia needs stronger currencies and Europe needs economic reform and more official help for the economy (lower interest rates and tax cuts). Both regions should eventually deliver the goods - the French EU constitution referendum was a big wake-up call for its politicians - but not just yet. In the meantime, all the risks to inflation are skewed to the downside.
Last modified: 15 June 2005
The long-term inflation threat in the West
All the risks to inflation are currently skewed to the downside (see - "The problem of deficient demand"). However, there are clouds gathering on the far horizon. Deflation is slowly loosening its grip on the Japanese economy. China's economic development is pushing up commodity prices. Asia will ultimately revalue its currencies. European voters will ultimately force the politicians to promote growth. Demographic trends in the West should mean more power for Trade Unions and more government borrowing. We may well be entering the last stages of the 24-year bond bull market.
Last modified: 15 June 2005
Geographical Picture
US rates still heading higher (for now)
The chances are that the Fed will continue to hike rates for the time being. Not only are rates still low relative to nominal GDP growth and inflation, but also Greenspan is concerned about the developing bubble in property prices. However, the flattening yield curve may be a sign that a pause in the tightening cycle is not too far away.
Last modified: 15 June 2005
The American bubble economy
Alan Greenspan rescued the US economy from the adverse impact of the bursting of the NASDAQ bubble by creating a whole range of other mini-bubbles - bonds, high yield debt, property and the NASDAQ (again). This policy of 'rolling bubbles' will continue so long as inflation remains under control.
Last modified: 15 June 2005
The economic outlook for Asia is set fair
Economic conditions have cooled a little in Asia as China continues to rein in its investment boom. The good news is that the tail off in exports is being balanced to some extent by a gradual pick-up in consumption. Furthermore, low inflation means that the way is clear for the Chinese authorities to provide targeted stimulus for the economy.
Last modified: 15 June 2005
Europe enters the end game
For many and varied reasons, Europe is an under-achiever. Economic reform is required at almost every level. The recent no vote in the French EU constitution referendum indicates that voters are fed up with high unemployment and low growth. Unfortunately it is not clear what they want to happen - half voted no because they want more socialism and half because they want less. Under such circumstances, French politicians are unlikely to grasp the nettle of reform and will be tempted to 'muddle through'. The bottom line is that change is in the air, but things may need to get worse before they get better.
Last modified: 15 June 2005
6 - 12 Month Market Outlook
A bounce in the euro
Despite oversold technical readings and evidence of excessive pessimism, the euro (currently $1.21) has continued to fall versus the dollar as investors have speculated that a major change in European policy is at hand (see - "Europe enters the end game"). However, even if the euro is destined to fall further in the months ahead, a bounce of some magnitude should be seen in the near term. First, the euro is now more oversold versus the dollar on our model than at anytime since its launch in 1999. Second, it seems likely that expectations of a major shift in policy will be disappointed in the near term. Third, it is far from clear that the dollar itself is out of the woods.
Last modified: 15 June 2005
The trend for stockmarkets is sideways/down (for now)
We expect stockmarkets to be stuck in a range for the time being, with their downside protected by reasonable valuations (particularly versus bonds) and their upside capped by rising commodity prices, currency volatility and worries regarding the outlook for corporate earnings. Ultimately we expect Europe and Asia to do more to promote consumption, which should lead to a new uptrend for stockmarkets and a downtrend for bonds (see - "The problem of deficient demand").
Last modified: 15 June 2005
Bond risks are building
A combination of deficient demand (i.e. intense global competition and low inflation) and surplus savings (i.e. demand for bonds) will keep bond yields low for now. However, the risks of a significant correction are building. First, there are signs that bond sentiment is starting to turn bullish having remained stubbornly bearish all year. Second, global bonds are approaching overbought territory on our model. The biggest threat to bonds is presented by the scenario whereby Europe sorts out its problems (see - "Europe enters the end game") and Asia revalues its currencies.
Last modified: 15 June 2005
Things are looking up for gold
Gold has recently been strengthening despite the strong dollar and has broken upwards against a broad range of currencies. Is this a sign that investors are losing faith in paper money? Possibly. More likely it is a sign that the current dollar rally is long in the tooth and a correction is just around the corner.
Last modified: 15 June 2005
Preferences - Equities
Japan: down but not out
Japan has recently been something of a disappointment. Not only has it fallen in absolute terms, but also it has underperformed other major markets due largely to worries over the health of the economy and anti-Japan demonstrations in China. However, the current concerns regarding the economy are not expected to last and the spat with China is nothing more than a storm in a teacup. What's more, the Nikkei is now close to the low end of its 12-month range, valuations remain compelling and the relative line for bank shares (a key indicator) is holding above key support. We remain positive with regard to the long-term outlook.
Last modified: 22 April 2005
Asian equities are the pick of the bunch
America has a strong economy with a fully valued equity market. Europe has a lacklustre economy with cheap equity markets. Asia, with its strong economy and cheap equity markets, stands out as the most attractive region. Furthermore, it has demographics on its side, deflation is ending in Japan and the Asian consumer is emerging as a major force in the global economy. Last modified: 23 November 2004
Preferences - Bonds
US TIPS - a good each-way bet
Despite the fact that we expect inflation to remain pretty stable in the months ahead, we like US Treasury Inflation Protected Securities. Not only are they oversold relative to fixed income securities, but they tend to outperform when the dollar falls and commodity prices rise (essentially the scenario we foresee in the near term).
Last modified: 15 June 2005
Preferences - Currencies
The dog with least fleas
The current challenge in the currency markets is to find the dog with least fleas. The euro is relatively expensive and overshadowed by the EU constitution no votes and the possibility of a big change in economic policy. The pound is also expensive and there are signs that its high interest rates won't be around for much longer. The US dollar is cheap and backed by rising interest rates, but there is that large current account deficit. Asian currencies are cheap, but economic conditions have deteriorated of late and a renminbi revaluation does not look imminent. Overall, our sense is that the euro has the best potential in the short-term simply because everyone is currently so negative.
Last modified: 15 June 2005
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Ashburton bond and equity comment - 10 Jun 2005
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Tuesday, 14 June 2005
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General Market Analysis
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The recent strength in the bond markets seen of late saw some consolidation last week as US 10 year yields rose back above the 4% level. The US dollar weakened initially during the middle of the week but ended the week with a strong rally as better than expected US trade balance figures were released on Friday. In the equity markets, Wall Street moved only slightly higher over the week with relatively little in the way of corporate or economic news to entice investors either way. However, mid-quarter updates from leading semiconductor groups Texas and Intel were bullish, although this had already been largely discounted by the markets. The Federal Reserve's testimony to Congress was also broadly positive with Alan Greenspan suggesting that the US economy was on a "firm footing" and underlying inflation remaining contained. Japanese equity markets spent the week in a tight trading range and remained focused on external events to provide direction. The recent out-performance of the large blue chip exporters slowed as investors revisited domestic demand and mid-to-smaller companies. Elsewhere in the region, Taiwan performed strongly amidst higher volumes as local investors have finally begun to buy the market. The mainland Chinese markets had their biggest one-day gains for months on the back of speculation that the authorities will introduce initiatives to support the markets. The Euro-stoxx managed to make a new 3 year high, helped by the better than expected US trade figures. German industrial orders and production figures deteriorated in April, adding to speculation that interest rates may be cut. Oil and Gas had another strong week and was one of the strongest sectors in the market.
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Strategy Note - 06 Jun 2005
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Wednesday, 8 June 2005
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General Market Analysis
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A contrary opportunity in the euro
In the week following the French no' vote investors have become increasingly despondent about the euro. Many analysts have slashed their forecasts for the single European currency and some have even talked about the possibility that it may be about to break apart. This is just what we would expect to happen around a low of some significance. Indeed, most of our technical trading tools are now telling us that the euro is due for a decent recovery. We have therefore decided to introduce a 9-10% weighting in the euro at the expense of the Japanese yen (which has risen 7% versus the euro in the past six weeks).
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Ashburton bond and equity comment - 3 Jun 2005
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Tuesday, 7 June 2005
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General Market Analysis
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Bond markets had a strong week with US treasuries leading the advance after worse than expected non-farm payroll figures (78,000 vs 175,000 expected). In the currency markets the dollar still remained strong whilst the euro slid over 2.5% to its lowest level since September 2004 after the French and Dutch voted 'No' with regard to the referendum. Elsewhere, the US equity Indices were stronger earlier in the week, following comments by a Federal Reserve official that the interest rate tightening cycle was nearing an end, however they ended on a disappointing note. This followed the weak jobless report, and as renewed strength in the price of oil raised fears that consumer spending may slow. Other economic data also suggested that the US economy may be slowing whilst increased labour costs reflected that inflationary pressures still remain. In Asia, the Tokyo market had a catch-up rally during the first part of the week but lost ground during the second half as the high balance of buying on margin created substantial selling pressure. The large-cap stocks are underperforming again after they drove the market higher on the back of lofty levels of international exposure. Not surprisingly, the energy sector has bounced higher as the price of oil makes its way back up to retest previous highs. There is a clear preference by investors for strong earnings and low valuations despite the forecasted dividend yield softening slightly. Elsewhere in Asia, the technology sector continues to gain momentum on the inventory build-up situation but the valuations do not support this current rally. The commodities stocks and sectors finished the week strongly and hence Indonesia and Philippines put in the best performance. Despite Thailand's relatively good performance, the current account deficit reached a nine year high on the back of surging imports, mainly oil, and a hefty plummet in tourism numbers. European markets moved higher last week (1.5%) and oil rallied sharply, with Brent hitting its highest level since mid April. Domestically Europe continues to struggle, with French consumer confidence at its lowest level since 2003. The ECB cut its GDP growth, but left rates unchanged.
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Ashburton Strategy Note - The French vote 'no'
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Wednesday, 1 June 2005
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General Market Analysis
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Ahead of Sunday's French referendum on the EU Constitution it looked like this was going to be another classic case of buy the rumour, sell the fact'. After all, most of the opinion polls were widely predicting a victory for the no' camp and the futures exchanges were reporting that investors had already substantially scaled back their exposure to the euro. Furthermore, our model was showing the dollar to be heavily overbought versus European currencies such as the euro and the Swiss franc. This is why we decided to increase our exposure to the Swedish krona ahead of the vote on Friday.
In the event there has been a surprisingly large reaction by the currency markets to the no' vote, with the euro being marked down almost 2% versus the dollar, yen and pound. Other European currencies such as the Norwegian krone, Swedish krona and Swiss franc have also been marked lower, albeit to a lesser extent.
This feels like capitulation to us. The euro has been weakening for weeks and suddenly the consensus has a story to latch onto just as the trend enters its final stages. Everything suggests that a turning point of some significance is at hand. The dollar is overbought and dollar sentiment is bullish (which is negative from a contrary perspective). In addition, we can't see why the no' vote is so disastrous for the euro. Yes, it highlights that Europe is in a mess, politically and economically, but that is hardly earth-shattering news. Furthermore, if Europe is heading for trouble it will mean lower imports from abroad and most probably a larger US current account deficit hardly a reason to be positive on the dollar. As far as we can see, this weekend's events strengthen the case for stronger Asian currencies, rather than for a stronger dollar.
The bottom line is that although we have under-estimated the recent strength of the dollar, we are reluctant to chase it higher, given that so many of our trading tools are pointing to a dollar correction. Furthermore, we have long believed that the dollar's recovery versus the euro would only begin in earnest when China finally decides to revalue its currency. Whatever the near term outlook, it is important to point out that we currently have very little exposure to euro, with most of our European currency exposure invested in the Swedish krona an undervalued currency (versus the euro) that is backed by a pretty healthy economy and a large current account surplus.
Peter Lucas, Global Investment Strategist, 31 May 2005
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Ashburton bond and equity comment - 27 May 2005
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Wednesday, 1 June 2005
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General Market Analysis
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Bond markets consolidated their recent gains and ended slightly down last week whilst the dollar continued to strengthen further versus most of the majors. Elsewhere in the equity markets a rally in technology and energy stocks led the US indices higher on the week. Technology shares have lagged the market this year and industry consultants have suggested that signs of falling inventories and increased demand will benefit the group. The market's rise was greatly aided by an upwardly revised first quarter GDP report, from 3.1% growth to 3.5%, and the lack of any sign that inflation was accelerating. Other economic data was generally supportive with a continuation of strong home sales figures and an easing in jobless claims. After generations of demoralising land price deflation in Japan, the commercial land prices on a yearly basis were up for the first time in 14 years. Among the assorted economic releases, the CPI gave a minor indication to the improving domestic situation registering a small increase month on month. As we approach the end of the earnings season, the overall earnings have been somewhat mixed and the outlook far too conservative for investors. Again, the issue of the dividend policy and investor friendly management was frequently addressed by the companies during the season. In Asia, the technology sector has been strong on the back of inventory rebuilding by companies and in turn benefiting some Japanese names. Despite weak economic data from Germany and further evidence that the French might vote against the European Constitution, the pan European equity markets continued to rally. The heavy defeat of Schroeder in regional elections (followed by his decision to call an early general election) gave impetus to the equity markets. This is due to the belief that vigorous economic reform measures may now occur if the Christian Democrats come to power. Corporate merger rumours, particularly in the banking sector, also helped strengthen equities.
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Ashburton Strategy Note - Japanese land prices
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Friday, 27 May 2005
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General Market Analysis
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Japanese land prices..... finally rising again
The Japan Real Estate Institute this week announced its semi-annual Urban Land Price Index for end-March 2005. The previous survey showed residential land prices for Tokyo wards up for the first time in 14 years. The latest survey shows a rise in the price of commercial real estate in Tokyo's 23 wards over the end-September figure, as well as increases in commercial land prices in Japan's six major cities. Both up-ticks are the first since September 1990, nearly 15 years ago.
The Survey appears to confirm that land price deflation is over. The end of real estate deflation is a key component of the hopes for a turnaround in the domestic economy. Real estate deflation in Japan was inextricably linked to the bad debt trauma of the 1990's. The turnaround in real estate prices is consistent with growing evidence that the banking system is finally beginning to function normally and that the corporate sector is emerging from years of debt repayment with near record profit margins and free cash flow. The improvement in the labour market is also particularly encouraging, with employment rising at its fastest pace for several years, notably in regular rather than part-time employment.
So far, the broader economy has been hesitant to respond to the end of real estate price deflation. This probably reflects entrenched deflationary expectations that only the passage of time will heal. The hope is that this process accelerates as it becomes increasingly apparent that land price deflation is over.
Jonathan Schiessl
Investment Manager
24 May 2005
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Ashburton Strategy - Buying inflation-linked Bonds
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Friday, 27 May 2005
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General Market Analysis
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We continue to believe that, at best, bonds are stuck in range and at worst they are building up to a nasty bear market. With this in mind we have preferred to remain defensively positioned unless a particularly attractive opportunity presents itself .
Our last major bond purchase came in March when they were heavily oversold. We subsequently took profits in April after the market bounced back. Our recent preference has been for short-dated US bonds. When we first bought them they were oversold (both on an absolute basis and relative to other bond markets) and offered a considerable pickup relative to cash with minimal risk. We therefore felt that they represented a good conservative each-way bet in an uncertain world. More recently, the case for short-dated bonds has diminished they are no longer oversold and their yield advantage relative to cash has shrunk as interest rates have risen.
In the meantime, Treasury Inflation Protected Securities (US inflation-linked bonds or TIPS for short) have become progressively more attractive. As the dollar has rallied and commodity prices have fallen back, so inflation-linked bonds have underperformed their fixed income counterparts. Indeed, the yield gap between the two (the so-called breakeven inflation rate) has shrunk considerably (from around 3.0% to 2.5%) to the point that TIPS now look the best each-way bet in the bond market. Why? Consider the following:
- The weekly RSI is now at the sort of levels that have foreshadowed rallies in the breakeven inflation rate (a rising breakeven inflation rate means that TIPS are outperforming their fixed income equivalents).
- The big jump in consumer price index registered in March and April means that the rate of accrual on TIPS (inflation plus the real yield) is very attractive.
- Our preferred view is that oil and the euro are both close to a short-term low. A recovery in both has historically been associated with a rising breakeven inflation rate.
We have therefore switched all our remaining 2-3 year US bonds into 8-10 year TIPS.
Peter Lucas
Global Investment Strategist
25 May 2005
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Ashburton Strategy Note - Update on the US dollar
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Friday, 27 May 2005
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General Market Analysis
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Our last communiqué on the US dollar came in the form of a new bullet point on the Ashburton Investment View webpage in late April. The view expressed at the time was that the euro would retest its high ($1.36) before the US dollar rally got underway in earnest. In the period since, the US dollar has actually strengthened, with the euro falling as low as $1.254 just last week. Despite the US dollar's recent burst of strength, we are reluctant to chase it higher and we still think that there is a reasonable chance that the euro will test its high in the weeks ahead.
To understand why we remain positive on the euro (at least in the near term) it is important to remember why it has been so strong in recent years. The main preoccupation of currency investors in recent times has been the large US current account deficit. Logically they should have expressed their concerns by selling the US dollar against the currencies of those countries that were on the other side of the American deficit, i.e. the surplus countries of Asia. However, capital controls and foreign exchange intervention by Asian central banks rendered such action either difficult or pointless. Hence, investors have sold the US dollar versus the euro as the next best course of action. However, euro strength was never likely to solve America's deficit problem. Indeed, we would argue the strong euro has actually worsened the plight of the European economy, thereby reducing the region's appetite for imports from America or elsewhere for that matter. Until there is a general revaluation of Asian currencies, we believe that the US deficit will remain large and the US dollar will find it hard to recover significantly versus the euro.
The recent US dollar recovery has been driven by two main factors: rising interest rates, a smaller trade gap and the forthcoming French referendum on the EU constitution. But will it last? Rising interest rates are attracting foreign capital into America. However, it is important to remember that they are rising because the economy is in reasonably good shape. Indeed, America continues to do rather better than many of its trading partners. This is not a recipe for a smaller trade gap. If (as we suspect) the good April trade number proves to be an aberration, the US dollar should give up much of its recent gains. The French referendum is too close to call. However, we suspect that most of the bad news is now in the price. In the event of a no' vote any dip in the euro is likely to be short-lived. If the French vote yes', the euro could actually rally quite sharply. Data released by the futures exchanges shows investors to be very long' of the US dollar. Historically, this has usually been a reliable indicator of tops in the US dollar (albeit that it can sometimes be a little early). Furthermore, the US dollar remains overbought on our model.
Ultimately, we expect Asia to revalue its currencies. Indeed, with America and Europe turning up the heat on China, we feel that something will develop before the year is out. This should be the catalyst for some improvement in the US trade gap and a rally in the US dollar versus the euro and the pound. However, in the meantime, the bias for the US dollar will remain sideways or (more likely) down.
Peter Lucas
Global Investment Strategist
25 May 2005
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Ashburton bond and equity comment - 20 May 2005
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Tuesday, 24 May 2005
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General Market Analysis
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World bond indices remained fairly flat on the week, whilst US equity markets had their biggest weekly advance in six months on the back of a steep fall in oil prices and growing optimism that the economy can sustain growth without fuelling inflation. A government report on consumer prices released early in the week was unchanged, prompting speculation that the Federal Reserve may be close to ending its series of interest rate increases. However, the dollar continued its recent spell of strength to end the week higher against most of the majors. Other good news for the economy was a sharp drop in weekly jobless claims (321,000 vs. 330,000 expected). These events overshadowed weaker manufacturing and industrial production data. Retailers led the rally after Home Depot and JC Penney reported higher-than-expected earnings and Lowe's reiterated its annual profit forecast. The Japanese market finished the week virtually unchanged, despite striking a new year low midweek after seven straight days of decline. Both the short-term and long-term revisions remained firm during the peak of the earnings season. The increased risk aversion among overseas funds meant the small-cap and OTC stocks bore the brunt of the heavy market selling. In Asia, the Chinese authorities have implemented many measures to cool the overheating domestic property, especially in the major cities of Shanghai and Beijing. Hence, the performance of the local market persists on the back of falling property development prices. The outperformance of the Australian banks comes at the expense of profit-taking in the commodity names across the board. The allure of the generous yield and safety factor in a turbulent market proved too much for investors to switch. European markets rose 1.3%, led higher by IT Hardware, Mining and Autos. The US dollar strength helped to alleviate the margin constraints for exporters. Oil prices continued to consolidate and now stand at US$48bbl, a move that further helped market sentiment. Following two consecutive quarters of decline, the eurozone's industrial sector is now technically in recession. French GDP disappointed and eurozone inflation remains at the 2.1% level. Macro factors are now pointing to a rate reduction, rather than a rate rise.
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Ashburton bond and equity comment - 13 May 2005
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Wednesday, 18 May 2005
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General Market Analysis
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The March US trade deficit unexpectedly narrowed to $55 billion (vs. $62 billion expected) which helped to push the dollar higher throughout the week. News that hedge funds may be experiencing liquidity problems sparked a rally in the bond markets as investors sought a route to safety. In the equity markets, the Dow and S&P declined on the week despite positive economic data as concerns over slowing global demand resurfaced. April retail sales beat estimates (+1.4% vs. +0.7%), whilst a decline in the price of oil (down over 4% on the week) may bolster consumer spending. However, a sharp decline in commodity prices and hedge fund concerns overshadowed these events, dragging the indices lower on the week. Technology was the only sector in positive territory, led by Dell and Cisco, after both companies delivered excellent earnings reports. The Nikkei index fell for five straight days last week as foreign investors remained sellers. The earnings season has been mixed so far and in turn provides the opportunity for investors to take profits on positions. The ongoing poor performance of the large cap stocks, heavily exposed to international investment trends (particularly in the commodities and financial sectors), is a sign of risk avoidance by global investment funds. In Asia, markets dragged lower over the week on the lack of enthusiasm or fresh news. Midweek, the main headline was the release of a yuan revaluation story misinterpreted as an official statement, sending investors scrambling in the currency markets. European markets drifted half a percent lower this week, led lower by mining stocks (-6.7%) and Energy (-4.3%). Oil fell below $50bbl on the back of news that there has been further stock build ups in the US. This helpful development for petro-cost based industries was somewhat negated by the considerably stronger dollar. However, on balance, these are helpful developments for exporting industrials. Eurozone GDP figures continue to look limp (Q1 Eurozone is currently 0.5%, with Italy showing contraction at -0.5%). France's manufacturing sector shrank 0.3% and is now in recession and the UK's industrial production contracted faster than expected.
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Ashburton bond and equity comment - 6 May 2005
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Thursday, 12 May 2005
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General Market Analysis
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US 10 year yields crept higher last week as better than expected new job figures were released (274,000 workers in April vs. 175,000 expected). The Fed boosted the benchmark short-term rate by another 25bps to 3% which helped to push the dollar higher against most of the majors. US stocks had their biggest weekly gains in three months: new job creation figures suggested that higher costs and a first-quarter slowdown have not shaken companies' confidence in economic growth. Automakers were the best performers on the week, surging over 7% after billionaire Kirk Kerkorian revealed he was building his stake in General Motors. Trading in the Tokyo market was light as many investors took holidays for Golden Week: Tokyo Stock Exchange volume on 2 May fell below 1billion shares for the first time in eight months. However, the market rose across the board on the 6th, with investors reversing earlier hedge-selling in response to the Fed's eighth straight rate rise and other major events in line with expectations. In Asia, the yuan revaluation hype reached fever levels as continued foreign pressure on China and national holidays heightened speculation. Midweek, the Australian central bank held interest rates unchanged but reported a series of poor economic data pointing to a softening property market and retail sales. European equities rebounded from last week's sell-off, finishing up 2%. The steel and mining sectors led the rally, helped by some positive global markets and encouraging US job statistics. In the eurozone, the PMI confirmed the sharp downturn in economic activity and the ECB kept rates unchanged. There has been growing speculation that the ECB may look to actually cut rates.
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Ashburton Investment View changes 26 April 2005
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Wednesday, 4 May 2005
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General Market Analysis
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Core View
Equities remain cheap relative to bonds
Rising company profits have meant that price-earnings multiples (a key equity valuation yardstick) are barely changed since March 2003. Meanwhile, global bond prices remain close to multi-decade highs. As a result, despite the post-March 2003 stockmarket recovery, our valuation models still favour equities over bonds. That means that in the short-term, providing company profits do not fall (our preferred view), the downside for equities is probably quite limited and on a 1-2 year view equities, will almost certainly beat bonds.
Last modified: 22 April 2005
Phase two of the equity bear market is complete
It is our belief that Western equity markets are following the typical post-bubble pattern: a sharp fall followed by a long period of range trading. The first phase began on Wall Street in October 2002 and in Europe during March 2003. The second (recovery) phase is now complete. The third phase is expected to last several months and should see Western equity markets return to their lows of August 2004, implying losses of 10-15%. Our best guess at this early stage is that phase four (the next major rise) will begin in the third quarter of 2005.
Last modified: 17 March 2005
This economic recovery will run and run
The current global growth cycle is expected to rumble on for several years to come, with Asia the locomotive, Europe the laggard and America somewhere in between. 2005 should prove to be a year of steady, if unspectacular, growth.
Last modified: 14 January 2005
The long-term inflation threat
Global spare capacity is slowly being eroded by the ongoing growth cycle. Deflation is finally loosening its grip on the Japanese economy. The economic development of China is putting upward pressure on commodity prices. Demographic trends in the West should mean more power for Trade Unions and more government borrowing. Inflation is unlikely to be much of an issue in the near term but clouds are gathering on the far horizon.
Last modified: 14 January 2005
The interest rate cycle has turned
Interest rates have either started to rise (or are about to do so) in much of the developed world. The strong euro has raised the possibility of one last rate cut in Europe but the more likely outcome is a long period of low, stable interest rates.
Last modified: 23 November 2004
Geographical Picture
A pause in the US interest rate cycle?
The Federal Reserve's tough talk on interest rates has finally spooked the markets. The irony is that if inflation remains low in the near term (as we expect), lower stockmarkets may cause the Fed to slow the rate at which they raise interest rates or may even cause them to stop altogether for a while.
Last modified: 17 March 2005
The American bubble economy
Alan Greenspan rescued the US economy from the adverse impact of the bursting of the NASDAQ bubble by creating a whole range of other mini-bubbles - bonds, high yield debt, the NASDAQ (again) and property. His tough talk on interest rates has recently spooked the markets, but their downside is unlikely to be disastrous in the near term. Why? Lower markets combined with low inflation will likely stay the Fed's hand on interest rates (see "A pause in the US interest rate cycle?"), thereby laying the foundation for another leg higher in share prices. In other words, the policy of 'rotating bubbles' will continue unless (until) inflation rears its ugly head.
Last modified: 17 March 2005
The economic outlook for Asia is set fair
Asia is finally allowing its currencies to appreciate versus the US dollar. This is great news for inflation and will ultimately be great news for the Asian consumer. China continues to drag its feet but this should change once speculation regarding a Renminbi revaluation has died down.
Last modified: 14 January 2005
Europe needs to reform but progress will be slow
For many and varied reasons, Europe is something of a global under-achiever. Economic reform is required at almost every level. Unfortunately it is unlikely to be forthcoming any time soon. Europe is roughly where Japan was in the mid 1990's - the private sector is starting to grasp the nettle but the voting public remains very complacent and politicians have no stomach for reform. It will take a long period of poor economic performance before the electorate 'gets it' and votes for change.
Last modified: 14 January 2005
6 - 12 Month Market Outlook
A new high for the euro ahead?
Although we remain of the opinion that the US dollar will see higher levels versus the euro before the year is out, it looks like the bottoming process has further to run. Indeed, our technical analysis suggests that it is quite possible that the euro will see a test of its high ($1.367) in the next few weeks. Sentiment analysis supports this view. Data on long/short positions at the futures exchanges reveals that investors were very 'long' of the dollar at its recent peak , leaving the way open for dollar weakness in the near-term.
Last modified: 22 April 2005
The trend for stockmarkets is down (for now)
Slowing growth and rising interest rates have precipitated a global stockmarket correction. Eventually, slowing growth will cause interest rates to plateau and stockmarkets to bounce back but we're not there yet. In the very short-term, stockmarkets are oversold and a recovery already looks to be underway.
Last modified: 22 April 2005
Outlook for bonds: down-up-down
Bonds have been the mirror image of equities for much of this year - falling when equities rise and vice versa. We expect this pattern to continue for the time being, with the implication that bonds will (a) sell-off near term (b) recover as the second leg of the equity correction unfolds and (c) post a major peak as the next uptrend in equities gets underway.
Last modified: 22 April 2005
Gold remains the mirror image of the US dollar
In the absence of a serious inflation threat, the gold price continues to dance to the tune of the dollar, as evidenced by its relative stability in other currencies (the sterling gold price is almost exactly where it was two years ago). With the dollar expected to weaken in the near term (see "A new high for the euro ahead?"), the chances are that the gold price will rise.
Last modified: 22 April 2005
Preferences - Equities
Japan: down but not out
Japan has recently been something of a disappointment. Not only has it fallen in absolute terms, but also it has underperformed other major markets due largely to worries over the health of the economy and anti-Japan demonstrations in China. However, the current concerns regarding the economy are not expected to last and the spat with China is nothing more than a storm in a teacup. What's more, the Nikkei is now close to the low end of its 12-month range, valuations remain compelling and the relative line for bank shares (a key indicator) is holding above key support. We remain positive with regard to the long-term outlook.
Last modified: 22 April 2005
Asian equities are the pick of the bunch
America has a strong economy with a fully valued equity market. Europe has a lacklustre economy with cheap equity markets. Asia, with its strong economy and cheap equity markets, stands out as the most attractive region. Furthermore, it has demographics on its side, deflation is ending in Japan and the Asian consumer is emerging as a major force in the global economy.
Last modified: 23 November 2004
Preferences - Bonds
The best of a bad lot
We retain our preference for the US bond market, which offer better value than most other markets (albeit the best of a bad lot) and is the most oversold on our model. We particularly like short-dated US bonds which have factored in a lot of bad news on interest rates and offer defensive characteristics in an uncertain environment.
Last modified: 22 April 2005
Preferences - Currencies
Asian currencies enter the spotlight
The long-term case for Asian currencies is compelling (cheap valuations and large current account surpluses). However, with the dollar looking vulnerable and the euro overshadowed by the forthcoming EU constitution referendum in France, the short-term picture looks pretty good too.
At the tail end of 2004 we said that the yen would be one of the strongest major currencies in 2005 (due to its cheap valuation and Japan's large current account surplus). Although it started the year well, it has since floundered as investors have fretted about the health of the Japanese economy. However, in the last few days the yen has bounced back and started to take out some important technical levels. This could well be the start of a major trend - watch this space!
Last modified: 22 April 2005
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Ashburton bond and equity comment - 29 Apr 2005
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Wednesday, 4 May 2005
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General Market Analysis
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Most US stockmarket indices ended what proved to be a volatile week marginally in positive territory. Although there was plenty of good news in the shape of solid company earnings and a lower oil price, it was balanced by bad news on the economic front, with most reports pointing to lower growth and higher inflation. European markets suffered a 2% pull-back this week, led lower by technology, industrials and media. European short-term growth prospects continue to be uninspiring. The German IFO figures confirmed the lack of visibility over growth (particularly in manufacturing). France is also showing signs of macro pressure, as evidenced by deteriorating household and business confidence numbers. The Japanese market has entered the earnings season and spent much of last week winding down ahead of 'golden week' holidays. Anti-Japan demonstrations in China subsided, following several meetings and an apology from Prime Minister Koizumi. The Thailand government has raised the price of diesel hitting construction and transportation sectors as well as lowering their official projection for the economic growth. The Indonesia market has been a notable underperformer of late following a scandal at one of the large banks. Stockmarket volatility continued to encourage investors to seek out the relative safety of bonds, leading to a mild rise in prices through the week. The currency markets were dominated by a general rise in Asian currencies, as speculation of an imminent revaluation of the Chinese currency continued to build.
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Ashburton bond and equity comment - 22 Apr 2005
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Thursday, 28 April 2005
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General Market Analysis
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Bonds had a relatively volatile week which saw US 10 year yields fall to 4.17%, a level not seen since February this year, however, higher than expected CPI figures for March forced yields back up near 4.30%. The dollar saw increasing weakness throughout the week, touching the 1.92 level versus the pound. Elsewhere, US equity indices rebounded from 2005 lows to record gains on the week as companies reporting 1st quarter results surpassed estimates. The markets began the week nervously, as mixed inflation data renewed concern about rising interest rates and a decline in the index of leading economic indicators resulted in a sharp sell-off. However, two-thirds of S&P companies that have reported results have exceeded expectations. Energy issues were the top performers on the week as oil prices had their biggest weekly rally in over 3 months. Japanese markets suffered heavy losses early last week in response to falling Western markets and an escalation of anti-Japanese demonstrations throughout China. The Nikkei fell to its lowest level since last year before recovering towards the later part of the week. Elsewhere in the region, a perceived decline in risk appetite hit most Asian markets whilst Hong Kong managed to outperform. First quarter GDP numbers from China proved to be stronger than expected, whilst speculation also intensified of a Chinese renminbi-revaluation as a result of increasing pressure from Washington. European markets had a poor week, falling 1.3%, led lower by concerns of a global slowdown. In the euro zone, industrial production declined and in France, consumer spending was weaker for the second consecutive month. Germany also produced some much weaker than expected ZEW figures (suggesting that investors' perception of the future state of the economy has turned more bearish).
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Ashburton Strategy Note 18 Apr 2005
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Friday, 22 April 2005
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General Market Analysis
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Crisis of confidence
Equity markets around the world have dropped sharply during the past week or so as investors have grown increasingly worried about the outlook for the global economy and the prospects for corporate profits.
Readers of our strategy notes and Investment Perspective will know that we were expecting some sort of equity market correction in the middle part of this year. However, it is fair to say that we have been wrong-footed by the timing of the sell-off and the poor showing by the Japanese equity market. The key question is where do we go from here? Consider the following:
- One of our main sentiment indicators for Wall Street recently fell to its lowest level since February 2003 (just before the last major low in share prices) it is unusual for the markets to behave so badly in the face of such pessimism.
- The Japanese stockmarket is now even more technically oversold than it was at the last major low in May 2004. The recent demonstrations in China against Japan are a concern but should ultimately prove to be a storm in a teacup.
- Equities are becoming extremely cheap relative to bonds. This suggests that all other things remaining equal the downside for equities may be quite limited.
Is it reasonable to assume that all other things will remain equal? There is no doubt that the level of economic activity has slowed in the global economy in the last few months as a result of rising US interest rates, a high oil price and the ongoing clampdown in China. However, there are a number of inbuilt stabilisers that will help to restore confidence. In the absence of a major inflation threat, lower equity markets will probably cause the Federal Reserve to pause in its efforts to restore interest rates to a more normal level. Lower bond yields (now down 0.5% from their recent high) will help to shore up the property market via lower mortgage rates. The oil price is already 10% below its recent high. The Chinese authorities may be persuaded to ease up on their restrictions. Who knows, this may be the shove that they need to revalue their currency.
In short, although the drop in stockmarkets will serve to further dampen confidence in the near term, it seems unlikely that it will translate into falling profits or a full blown recession. In which case, equities look a much better long-term bet than bonds. That said, equities have been rising for quite a long time (it's now over two years since the last major low) and a correction lasting several months that takes indices back to their August 2004 low would not be out of the question (note that Japan is virtually there already).
With equities so cheap relative to bonds, the implication is that equities are unlikely to experience another major drop until inflation rears its ugly head. That does not look likely in the near future but it may be something that we have to look out for in years to come.
In conclusion, although equity markets are currently looking shaky, investors shouldn't panic. We still expect equities to be higher in a year's time and in any event, there is a good chance that a short-term recovery will give us better levels at which to take protective action.
Meanwhile, things are looking up on the bond and currency fronts.
Having upped the bond weighting during March, we have benefited from the recent rise in bond prices. Indeed, we have taken this opportunity to take profits on the 8-10 year bonds that were bought in March and have replaced them with shorter-dated (more defensive) fixed income and inflation-linked securities.
The US dollar is looking increasingly vulnerable (we sold our last remaining exposure earlier this month). Not only is it the second most overbought currency on our model (after the pound) but also futures positioning suggests that investors are already very long' of the dollar, leaving the way open for a short-term sell-off. The growing likelihood of a non' vote in the French referendum on the EU constitution may limit the upside for the euro, hence our preference for Asian currencies and the Swedish krona.
Peter Lucas
Global Investment Strategist
18 April 2005
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Ashburton bond and equity comment - 15 Apr 2005
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Thursday, 21 April 2005
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General Market Analysis
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Global bond markets had a strong week which helped to push US 10 year yields near the 4.30% level. Empire manufacturing survey (an indicator of current economic performance) in the US registered 3.1, its lowest reading since April 2003, which aided the bond rally towards the end of the week and also put pressure on the dollar. US equity indices slumped on the week amid heavy volume as sluggish economic data suggested growth and consumer spending may be slowing. March retail sales were weaker-than-expected (+0.3% vs. +0.8%) and consumer sentiment for April declined. Elsewhere, interest rate concerns re-emerged following the release of FOMC minutes which stated that 'the required amount of cumulative tightening may have increased'. Corporate news was generally favourable but poor earnings forecasts from GM, IBM and Apple led to continued selling pressure. Japanese equities suffered the worst week since last year with indices falling for 5 consecutive days. Whilst headlines are filled with the rising tension between Japan and China, the primary reason for the falls is a response to weak markets in the US and an increase in risk aversion. Markets elsewhere in Asia were also heavily sold-off, with the previously strongly performing sectors such as commodities being particularly hard hit. European markets had a poor week, falling almost 2%. The worst sectors included basic materials, energy and Information Technology. The macro figures emanating from Europe continued to look lacklustre whilst French Industrial production showed a considerable deterioration and inflation was moderate.
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Investment view changes 20 Mar 2005
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Thursday, 14 April 2005
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General Market Analysis
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Core View
Phase two of the equity bear market is complete
It is our belief that Western equity markets are following the typical post-bubble pattern: a sharp fall followed by a long period of range trading. The first phase began on Wall Street in October 2002 and in Europe during March 2003. The second (recovery) phase is now complete. The third phase is expected to last several months and should see Western equity markets return to their lows of August 2004, implying losses of 10-15%. Our best guess at this early stage is that phase four (the next major rise) will begin in the third quarter of 2005.
Last modified: 17 March 2005
This economic recovery will run and run
The current global growth cycle is expected to rumble on for several years to come, with Asia the locomotive, Europe the laggard and America somewhere in between. 2005 should prove to be a year of steady, if unspectacular, growth.
Last modified: 14 January 2005
The long-term inflation threat
Global spare capacity is slowly being eroded by the ongoing growth cycle. Deflation is finally loosening its grip on the Japanese economy. The economic development of China is putting upward pressure on commodity prices. Demographic trends in the West should mean more power for Trade Unions and more government borrowing. Inflation is unlikely to be much of an issue in the near term but clouds are gathering on the far horizon.
Last modified: 14 January 2005
The interest rate cycle has turned
Interest rates have either started to rise (or are about to do so) in much of the developed world. The strong euro has raised the possibility of one last rate cut in Europe but the more likely outcome is a long period of low, stable interest rates.
Last modified: 23 November 2004
Geographical Picture
A pause in the US interest rate cycle?
The Federal Reserve's tough talk on interest rates has finally spooked the markets. The irony is that if inflation remains low in the near term (as we expect), lower stockmarkets may cause the Fed to slow the rate at which they raise interest rates or may even cause them to stop altogether for a while.
Last modified: 17 March 2005
The American bubble economy
Alan Greenspan rescued the US economy from the adverse impact of the bursting of the NASDAQ bubble by creating a whole range of other mini-bubbles - bonds, high yield debt, the NASDAQ (again) and property. His tough talk on interest rates has recently spooked the markets, but their downside is unlikely to be disastrous in the near term. Why? Lower markets combined with low inflation will likely stay the Fed's hand on interest rates (see "A pause in the US interest rate cycle?"), thereby laying the foundation for another leg higher in share prices. In other words, the policy of 'rotating bubbles' will continue unless (until) inflation rears its ugly head.
Last modified: 17 March 2005
The economic outlook for Asia is set fair
Asia is finally allowing its currencies to appreciate versus the US dollar. This is great news for inflation and will ultimately be great news for the Asian consumer. China continues to drag its feet but this should change once speculation regarding a Renminbi revaluation has died down.
Last modified: 14 January 2005
Europe needs to reform but progress will be slow
For many and varied reasons, Europe is something of a global under-achiever. Economic reform is required at almost every level. Unfortunately it is unlikely to be forthcoming any time soon. Europe is roughly where Japan was in the mid 1990's - the private sector is starting to grasp the nettle but the voting public remains very complacent and politicians have no stomach for reform. It will take a long period of poor economic performance before the electorate 'gets it' and votes for change.
Last modified: 14 January 2005
6 - 12 Month Market Outlook
The US dollar has turned the corner versus the euro
In December all the preconditions for a low in the dollar were in place - it was oversold, unloved and cheap (versus the euro and the pound). Despite the fact that the dollar has given back most of its New Year gains, we still believe that it will be somewhat higher (versus European currencies) in 6-9 months time. Although the euro (currently $1.339) looks to have a little more upside in the near term, we ultimately expect it to revisit $1.17-1.20 before the year is out. Asian currencies should hold their own versus the dollar during this period or may conceivably strengthen a little.
Last modified: 17 March 2005
The trend for Western stockmarkets is down (for now)
Western stockmarkets have broken below key support levels and option volatility has broken higher - both developments are ominous signs, at least in the short-term. Japan is the one major equity market that looks capable of rising during this difficult phase for equities. The good news is that the downside risks for equities are limited by stable inflation and cheap valuations (on our models).
Last modified: 17 March 2005
Bonds are due for a period of short-term relief
Bond prices have (finally) experienced a meaningful correction. Although we expect further losses in the months ahead, US bond prices may rebound temporarily in the near term given that they are oversold and stockmarkets are under pressure. The next major buying opportunity in bonds is not expected until the second quarter of 2005.
Last modified: 17 March 2005
Negative on gold
Gold has bounced back as the dollar has revisited the lower end of its recent range. Further gains are expected in the near term. However, with the dollar expected to strengthen on a 6-9 month view, the medium term outlook for gold is less constructive. We remain positive from a long-term perspective.
Last modified: 17 March 2005
Preferences - Equities
Japan is the best equity market
The Japanese stockmarket lagged behind the other major markets in the fourth quarter of 2004 but is now catching up fast. Valuations are cheap, the technical picture looks great and the evidence suggests that deflation is now on its way out.
Last modified: 14 January 2005
Asian equities are the pick of the bunch
America has a strong economy with a fully valued equity market. Europe has a lacklustre economy with cheap equity markets. Asia, with its strong economy and cheap equity markets, stands out as the most attractive region. Furthermore, it has demographics on its side, deflation is ending in Japan and the Asian consumer is emerging as a major force in the global economy.
Last modified: 23 November 2004
Preferences - Bonds
The pick of the bunch
The US bond market is currently the only one to own. It is by far the most oversold bond market on our models. Furthermore, the expected dollar recovers should help to reverse the US bond market's recent run of poor relative performance.
Last modified: 17 March 2005
Preferences - Currencies
The yen and US dollar are the preferred currencies
Our favoured currencies for the next six months are the dollar (see "The dollar has turned the corner versus the euro") and the yen. Of the two, the yen is our favoured long-term bet (cheap, backed by a large current account surplus, end to deflation in Japan).
Last modified: 17 March 2005
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Ashburton Strategy Note 1 Apr 2005
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Thursday, 14 April 2005
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General Market Analysis
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Getting back into the Singapore dollar
Although we like the US dollar (on a six month time horizon), we also like the currencies of Asia. Indeed, we think there is a good chance that they might actually outpace the US dollar. We owned the Singapore dollar briefly last year and have been keen to reintroduce some exposure at an appropriate juncture. That moment has now come.
US bonds are trying to bounce back from an extremely oversold technical position. This is probably only a temporary respite (we will be looking to sell bonds into strength) but it could last a week or so. As bond yields drift lower, it should also set the scene for a short-term setback in the dollar.
The US dollar has recently been quite strong versus the Singapore dollar as the economic news from Asia has deteriorated and the China revaluation story has sunk into the background. Indeed, the US dollar has risen back to the upper end of its five-month range.
Singapore bond yields have risen by 1% to 2-3% during the last year. That might not sound much but with inflation currently zero, real (inflation-adjusted) yields are actually pretty attractive by international standards.
As a result of the above, we have switched one of our short-dated US bond positions into similar maturity Singapore Government bonds.
Update on equities
We continue to believe that rising bond yields and interest rates (particularly in America) will ultimately sap investors' appetite for risk, leading to a correction in higher risk asset prices. In fact, it's already started to happen - witness the recent correction in US share prices and emerging market securities.
However, we are becoming increasingly convinced that equities might have one more go at the upside. Why? Firstly, US equity investors are now pretty despondent (which is positive from a contrary point of view). One sentiment index that we follow shows investors to be almost as negative today as they were at the stockmarket low of March 2003. Secondly, other high risk assets (e.g. emerging market debt) have become oversold and are bouncing back. Thirdly, our technical work (and that of the technical analysts that we speak to) suggests that a rally is in the wings. Fourth, bonds are experiencing a (temporary) recovery. As a result we have decided to remove our equity hedges (introduced 3 March), with a view to reintroducing them at higher levels.
In line with this equity strategy change, we have also switched the recently purchased Swiss francs into the Swedish krona for the following reasons:
- The Swedish krona has recently underperformed the Swiss franc and is now the most oversold currency on our model.
- The Swedish krona-Swiss franc exchange rate tends to correlate negatively with equities. In other words, the Swedish krona tends to outperform the Swiss franc when equity markets rise.
- The Swedish krona yields 1.2% more than the Swiss franc.
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Ashburton Strategy Note 29 Mar 2005
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Thursday, 14 April 2005
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General Market Analysis
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Taking profits on the Canadian dollar
Just over three weeks ago, we introduced a significant weighting in the Canadian dollar on the basis that it was oversold, out of favour and undervalued (relative to the prevailing fundamentals). The Canadian dollar has since performed well, registering gains against a broad range of currencies. It has been particularly strong versus the currencies that we sold at the time, namely the Swiss franc and the Swedish krona (both down around 4-5%).
Following this strong performance, we have decided to switch Canadian dollars back into the Swiss franc, for the following reasons:
- The Swiss franc has replaced the Canadian dollar as the most oversold currency on our model
- The Canadian dollar is now stronger than the level predicted by our gold/interest rate model
- The Canadian dollar-Swiss franc exchange rate has achieved the minimum technical objective for the downtrend and is now resting on a significant support level
- The overall environment (shaky stockmarkets, rising volatility) favours a safe haven' currency like the Swiss franc rather than a growth' currency like the Canadian dollar
Whilst on the subject of currencies, let's talk about the US dollar. Although we were anticipating a stronger US dollar, it is fair to say that we have been a little bit surprised by the timing and extent of its recent recovery. The good news is that the recent technical action has strengthened our conviction that the US dollar has seen its low for this cycle and we are looking to use the next major setback to increase our exposure to the greenback.
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Ashburton bond and equity comment - 1 Apr 2005
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Wednesday, 6 April 2005
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General Market Analysis
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Global bonds performed well during the week. In particular, US treasuries rose as the March employment report came in below expectations (110,000 vs. 220,000), pushing 10 year yields lower to the 4.45% level. The dollar weakened slightly on the back of the weak employment figures whilst the British pound continued to remain strong against most of the majors. Elsewhere, the Dow and NASDAQ ended the week lower as a surging oil price and disappointing economic data renewed investor concerns over the outlook for the US economy. Corporate news was generally light, although there were a small number of earnings warnings in the healthcare sector. Insurance giant AIG was the most notable mover, down 8% on the week after Moody's and S&P cut its credit rating because of suspected false accounting practices that may have inflated the company's net worth. The Tokyo market began last week in a waiting mode ahead of major economic data releases in Japan and the US. TSE First Section transaction value fell below Y1trn on the 28th, for the first time since 28 December 2004. The Nikkei average fell 192 points on the 29th, its largest fall this year, pushing the index below 11,600 for the first time since 24 February and creating a volatile situation going into the new fiscal year. In Asia, most of the markets finished the week flat but month end proved an enticing opportunity to take healthy profits and position portfolios for client reporting. The recent disappointing performance of Hong Kong is set to continue despite good corporate earnings. The short trading week in Europe saw volatility on light volume as a raft of economic figures on both sides of the Atlantic added confusion to the direction and pace of growth, inflation and interest rates. Both currencies and oil also succumbed to large swings, however, like equity indices, they virtually ended the week unchanged as, overall, the week's data was taken as neutral.
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Ashburton bond and equity comment - 24 Mar 2005
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Monday, 4 April 2005
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General Market Analysis
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On Tuesday, the Federal Reserve raised rates by a quarter-point for a seventh consecutive time to 2.75% but noted that 'inflation pressures have picked up in recent months'. Inflation concerns were also fuelled by an economic report which showed February consumer prices rose the fastest in four months (+0.4%). This helped to push the US dollar higher against most of the majors. Elsewhere in the bond markets, the Fed's stance on interest rate policy saw the bond markets sell off forcing yields higher. US equity indices declined as the Central Bank's interest rate hike was accompanied by hawkish comments from Greenspan that suggested an acceleration of further increases may be possible. The market was supported by increased earnings forecasts from heavyweights GE and Northrop Grumman, which encouraged investors that pockets of strength are still in evidence. The Japanese market prices have softened on the back of US equity weakness and disappointed expectations of a renewed acceleration in the economy. Dire macro numbers and global market holidays did nothing to help matters, in addition to the expected weakness surrounding the recent ex-dividend environment. In Asia, the strong dollar has shifted market expectations and raised concerns over rising interest rates. A shortened trading week in Europe witnessed a pull back in the oil price (down USD2 to USD53), the dollar also managed to strengthen, giving the market two good reasons to rally higher. German consumer and capital spending commitments continue to look less than convincing whilst the French consumers' resilience (in the face of high unemployment and moderate consumer confidence) corrected slightly but continues to be relatively buoyant.
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Ashburton Strategy Note 18 Mar 2005
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Wednesday, 23 March 2005
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General Market Analysis
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Adding to bonds
Further to our decision to switch TIPS (US inflation-linked bonds) into longer-dated fixed income securities, we have shifted bond strategy up another gear. We have bought more 8-10 year US fixed income securities, this time on a switch against defensive short-dated issues. There were two main reasons for this change:
Following its sharp fall of the past few weeks, the US bond market is now extremely oversold both in absolute terms and relative to other bond markets around the world. In fact our technical model is now at the sort of levels associated with the big buying opportunities of May 2004 and August 2003.
Recent events have increased our confidence that Western stockmarkets have passed their peak for this phase of the cyclical recovery. First, the poor performance of higher risk assets (e.g. the rand, emerging market debt and emerging market equities) confirms that investors' risk appetite is diminishing. Second, many stockmarkets have broken downwards through key technical levels. Third, stockmarket volatility has broken upwards through key technical levels (from unusually low levels), thus confirming the breakdown in equities. If share prices continue to correct, the likelihood is that investors will start to look at bonds once more.
With equities wilting, it is becoming increasingly likely that money will start to flow back into bonds. However, we will be looking to take profits into resulting recovery given that: (a) bonds are still not great value, particularly at the longer end of the yield curve (b) technically they don't look that great and (c) we expect the US economy to be stronger than most analysts expect.
As far as equity strategy is concerned, our decision to scale back our exposure to Western equities has proved to be quite timely given that we sold just three days before the recent peak. Japan and Asia still look fine, but we are monitoring the situation closely for any evidence of deterioration in the technical health in these markets.
The dollar looks to be entering the final phase of its downtrend versus a broad range of currencies and we are preparing to buy dollars and to sell our position in gold shares.
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Ashburton bond and equity comment - 18 Mar 2005
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Wednesday, 23 March 2005
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General Market Analysis
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Yields on 10-year US Treasury notes rose to the highest in more than seven months last week amid rising oil and commodity prices but proceeded to end the week relatively unchanged. Elsewhere in the currency markets, the dollar saw a small period of consolidation whilst the Canadian dollar and euro continued their advance against most of the majors. US equity indices declined as record oil prices and a disappointing forecast from General Motors dragged the market lower. Crude gained another 4% to $56.72, despite OPEC's announcement that it would raise production limits by 500,000 barrels a day. Economic and corporate news, whilst positive, provided little support. Government reports reflected a strong economy, which was expected. February retail sales showed good growth and industrial production was up a steady 0.3%. Underlying concerns about inflation, interest rates and oil prices continue to weigh on sentiment. The Topix index in Japan finished the week on a new high for the year, at levels last seen in early 2004. Domestic and asset rich stocks performed well amidst speculation that the forthcoming official publication of the latest Japanese land price data will show deflation in land prices is coming to an end. Elsewhere in the region, Korea came under selling pressure following recent strong gains and the Taiwanese market was sold off over concerns about relations with mainland China. In Europe, the market consolidated this week as high oil prices continued to put pressure on industry and consumers. In Germany, Schroeder proposed cutting corporate income tax from 25% to 19%, in a further effort to stimulate the economy and reduce the flow of businesses flowing out of Germany and into Emerging European countries. The German ZEW figure illustrated that future industrial optimism is improving, a positive sign for European markets.
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Ashburton bond and equity comment - 11 Mar 2005
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Tuesday, 15 March 2005
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General Market Analysis
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US 10 year yields continued to advance on the week as bonds sold off further. In the currency markets, the US dollar weakened further amid choppy trading after the US trade deficit widened once again, whilst the Canadian dollar continued its recent burst of strength across most of the majors. In the equity markets, the inexorable rise in the oil price to yet another new high led to profit- taking this week and the US Indices failed to hold onto recent gains. The persistent strength of oil is raising concerns over the dragging effect this will have on corporate profit margins and the knock on impact on consumer spending and inflation. However, energy issues were the weakest sector as investors booked profits, speculating that these stocks may be temporarily overbought. The Tokyo market advanced for the eighth straight day for the first time since August 1999. The Topix recovered past the 1,200 for the first time since 28 April 2004. Investors bought relatively low priced mid and small-cap stocks, as well as OTC names, driving the TOPIX mid-400 index to a post-July 2000 high and the Topix small-cap index to its highest level since August 1997. Elsewhere in Asia, the improved outlook was confirmed by healthy GDP figures for China and Thailand midweek but both managed to finish the week unchanged. Once again, Indonesia finished the week as one of the top performers. As commodities moved higher this week, European markets were negatively impacted. Oil reached a new high (Brent touching USD54.b/ bbl). Germany saw its industrial production figure rebound in January, however, this did not prevent many countries from reducing their German 2005 growth forecasts. The Bank of England left rates unchanged at 4.75%.
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Ashburton bond and equity comment - 4 Mar 2005
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Thursday, 10 March 2005
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General Market Analysis
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US equity markets advanced amid choppy conditions, as bullish investor sentiment outweighed concerns over rising interest rates and inflation. On Tuesday, stocks reacted poorly to worries that foreign holders of dollars and Treasury bonds may diversify into other currencies. In addition, oil surged as cold weather hit the Northeast and OPEC reiterated production concerns. By the week end, enough positive data filtered through to support the market. January Core CPI was weaker than expected, consumer confidence rose, jobless claims remained at low levels and 4th Quarter GDP was revised upwards to 3.8%, above the long-term trend. Within the market, energy and commodity-based sectors continue to perform well. After a poor start to the week, Japanese markets recovered amidst increasing signs that corporate Japan is finally beginning to take a more shareholder friendly approach as dividends and payout ratios are increased. News of increased takeover activity also helped sentiment. Elsewhere in the region, the Korean Central Bank caused chaos in the currency markets with rumours of a diversification of its foreign currency reserves. The Korea market, however, took the news in its stride and closed at multi-year highs. Taiwan also closed higher, at levels not seen since summer last year, on improving political relations with China. As oil prices rose sharply over the week, European markets consolidated but got some support from the oil, mining and steel sectors. In the Euro zone, poor business confidence figures were published by Germany, Belgium, Italy, and France. The euro strengthened over the week against the dollar, further adding to the negative sentiment.
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Ashburton bond and equity comment - 25 Feb 2005
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Tuesday, 1 March 2005
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General Market Analysis
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US equity markets advanced amid choppy conditions, as bullish investor sentiment outweighed concerns over rising interest rates and inflation. On Tuesday, stocks reacted poorly to worries that foreign holders of dollars and Treasury bonds may diversify into other currencies. In addition, oil surged as cold weather hit the Northeast and OPEC reiterated production concerns. By the week end, enough positive data filtered through to support the market. January Core CPI was weaker than expected, consumer confidence rose, jobless claims remained at low levels and 4th Quarter GDP was revised upwards to 3.8%, above the long-term trend. Within the market, energy and commodity-based sectors continue to perform well. After a poor start to the week, Japanese markets recovered amidst increasing signs that corporate Japan is finally beginning to take a more shareholder friendly approach as dividends and payout ratios are increased. News of increased takeover activity also helped sentiment. Elsewhere in the region, the Korean Central Bank caused chaos in the currency markets with rumours of a diversification of its foreign currency reserves. The Korea market, however, took the news in its stride and closed at multi-year highs. Taiwan also closed higher, at levels not seen since summer last year, on improving political relations with China. As oil prices rose sharply over the week, European markets consolidated but got some support from the oil, mining and steel sectors. In the Euro zone, poor business confidence figures were published by Germany, Belgium, Italy, and France. The euro strengthened over the week against the dollar, further adding to the negative sentiment.
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Ashburton Strategy Note 23 Feb 2005
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Friday, 25 February 2005
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General Market Analysis
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Madness in the bond markets - Part II
In our last strategy note, we drew parallels between the current market environment and that prevailing early last year. Our conclusions were as follows:
1. The recent rise in bond prices would ultimately be reversed (particularly at the long end of the yield curve).
2. The dollar was likely to be weak short-term but would resume its recovery once bond yields started to rise decisively.
3. The gold price could rise quite sharply short-term but would peak when the dollar turned the corner.
4. Inflation-linked bonds would outperform as bond yields gradually bottomed out.
5. The top in bond prices would also herald a multi-month correction in share prices.
Two weeks on and everything seems to be clicking into place. The technical picture for bonds has deteriorated significantly, with most markets breaking through key support levels. The dollar has dropped back into the lower half of its recent trading range. The gold price has rallied over 5%. Inflation-linked bonds have outperformed fixed income securities. Equity markets have started to look tired, with the S&P 500 recently registering its largest single-day decline since August.
The question is where do we go from here? Bonds look a little oversold at this juncture and look ripe for a short-term recovery. Yesterday's good US inflation figures have certainly helped to settle bond investors' jangled nerves. If the bond market recovers short-term, it should open the way for one final rally in equities and gold and a last dip in the dollar. We are standing ready to reduce equities (particularly in the West), reduce bonds, sell gold shares and buy the dollar.
In the meantime, we have tweaked currency strategy, selling our remaining position in Swiss franc cash (which has recently been one of the strongest currencies), replacing it with Canadian dollar cash. The Canadian dollar has been one of the few currencies that has failed to recover versus the US dollar and is now as technically oversold as it was when we bought it (profitably) back in December. Furthermore, it has diverged considerably from our model (which is based on interest rates and gold), which currently suggests that the Canadian dollar is around 4% undervalued'.
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Ashburton bond and equity comment - 18 Feb 2005
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Wednesday, 23 February 2005
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General Market Analysis
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Alan Greenspan's semi-annual monetary testimony suggested that whilst the US economy was on a sound footing, monetary policy was still viewed as too accommodative and the pace of rate tightening was unlikely to slow. This, combined with higher-than-expected core CPI figures released on Friday, caused the US 10-year yield to climb higher throughout the week and whilst the dollar initially strengthened after Greenspan's comments, it still ended the week lower versus the euro and the pound. US equity indices had a mixed week as investors digested the Federal Reserve's latest prognosis on the American economy. Financial and technology stocks were the weakest performers, whilst the energy sector remained well underpinned by a firm oil price, due to a shortfall in inventories. Disappointing Japanese GDP data failed to knock the wind out of current market momentum, with the Nikkei managing to finish the week marginally up. The formal announcement of the merger of two top banks is a major step down the road to the planned banking reform. In Asia, the typical unreliable Chinese industrial production points to the desired slowdown in the economy and possibly the long promised "soft landing". Korea and Taiwan were both strong on the back of multi year high foreign investor buying. In addition, the momentum continues to be strong in Indonesia and Thailand. Elsewhere in Europe, equities reached a 32 month high. However, slightly disappointing earnings coupled with firmer oil prices saw the indices level out. The UK market had to contend with a Bank of England report forecasting that inflation would be higher than previously expected over the next two years. Takeover speculation (Sainsbury's being the latest rumour) did, however, prop up the wider market.
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Ashburton bond and equity comment - 11 Feb 2005
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Thursday, 17 February 2005
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General Market Analysis
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The dollar ended the week lower and bonds also took a tumble as US 10-year yields climbed higher towards the 4.10% level. In the equity markets, the Dow finished the week in positive territory for the first time this year as a better-than-expected employment report reassured investors over economic growth. Q4 earning's figures remained the main focus of investor's attention during the week. American International Group led insurance stocks higher after delivering a positive earnings surprise and an internal review sparked by Eliot Spitzer found few cases of employee misconduct. Japanese markets advanced on the week to reach year to date highs to levels not seen since last summer. A number of surprise M&A deals in combined with a weak yen improved sentiment. Across the rest of Asia, most markets were closed for Chinese New Year. Thailand rose strongly on the week following the unprecedented election victory of PM Thaksin, before succumbing to some profit-taking late on. Elsewhere in Europe, markets had a good week, appreciating by over 1%. The leadership came from the basic resource sector as forestry, mining and chemicals all put in a good performance. Eurozone industrial production bounced back in France and Germany in December, spurred higher by lower oil prices. The Bank of England left rates unchanged, faced with a more reticent consumer and evidence that exporters continue to struggle with the sterling strength.
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Ashburton bond and equity comment - 4 Feb 2005
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Wednesday, 9 February 2005
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General Market Analysis
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Weak non-farm payroll figures released in the US on Friday sent 10 year Government yields lower (nearing the 4.05% level). Although the dollar temporarily showed signs of weakness after the payroll data, it proceeded to end the week stronger versus most of the majors. US equity indices posted their biggest weekly gain this year as investors digested a number of positive earnings surprises. Disney, Pepsi Co and Google posted excellent Q4 numbers and earnings for the S&P 500 are on target for 18% growth for the fourth quarter (3% ahead of prior expectations). Elsewhere, Fed policy-makers raised rates a quarter point to 2.50% and restated their intention to boost rates further at a 'measured' pace. The Japanese market was marginally up on the week in the response to calmness in overseas markets. Investors showed a marked preference for mid and small-cap names, lifting the small-cap index to its highest since 2004 and they generally stayed away from major stocks. In Asia, all eyes were on the Thai elections over the weekend in what will be a foregone conclusion for Thaksin and a resounding victory. The focus will continue to be on Thailand next week as one of the few markets to remain open over the Chinese New Year. European markets had a good week, rising over 2%, helped by an oil price and euro decline. Figures published during the week showed inflation easing to 2.1% year on year and the Purchasing Managers Index (manufacturing) rose for the second month running, undoubtedly helped, by the easing of the euro. On the negative side, German unemployment exceeded the 5m number (12.7%), its highest rate since World War II. Perhaps this will spur impetus towards further union reform.
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Ashburton Strategy Note 9 Feb 2005
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Wednesday, 9 February 2005
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General Market Analysis
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Madness in the bond market
Text books will have you believe that bond prices and interest rates are inversely correlated as interest rates rise, bond prices fall and vice versa. In reality, the relationship is rather more complex. Investors face a choice: they can either buy a bond (fixed interest rate) or stick with cash (variable interest rate). When an investor chooses to buy a bond, they do so in the belief that its fixed interest rate will exceed the average return on cash during the bond's life. Hence, it is quite possible that an investor will choose to buy a bond yielding less than cash if they believe that cash rates are set to fall. In other words, bond prices are driven not so much by interest rates, but rather by interest rate expectations . Indeed, if investors perceive that rises in interest rates will be bad news for the economy and good news for inflation, it is quite possible for long-dated bond prices to rise in the face of higher interest rates.
During the last eight months, US interest rates have risen and 30-year bond yields have fallen. Nothing wrong in that theory, as outlined above, allows for this kind of pattern. However, what is surprising is the extent of the divergence between the two: whilst interest rates have risen 1.5% (from 1.0% to 2.5%), the long-bond yield has fallen 1.0%. As far as we can tell, such a small rise in interest rates has never produced such a pronounced flattening in the yield curve. So, why have bonds performed so well? Conventional wisdom has it that the bond market is sensing that something sinister is happening i.e. the economy is heading for real trouble. But if that's right, why are equities still rising and why has the dollar been so strong of late? Could it be that bond investors are more perceptive than their equity cousins? Or could it be that we are witnessing yet another bubble in the making?
Thanks to the dramatic easing in US monetary policy that followed the bursting of the NASDAQ bubble, the world is awash with liquidity. In effect, the Federal Reserve has mitigated the adverse impact of the bursting of one bubble by creating a series of new mini-bubbles (property, bonds, stockmarkets and even technology shares). However, markets have not risen in a straight-line; liquidity has rotated from one asset class to another, causing them to lurch one way and then the other. This process is expected to continue until the Federal Reserve is forced by rising inflation to take away the punchbowl'. That is unlikely to happen in the near future and hence we must expect these big swings in asset prices to continue.
Early last year, the US bond market went into bubble-mode' as investors grew concerned about the sustainability of the economic recovery. However, when it became clear that the economy was fine, the rise in bond prices was violently reversed. Two other interesting observations from that period: (1) as the uptrend in bond prices accelerated, the dollar weakened, the gold price shot up, equities did pretty well and inflation-linked bonds outperformed their fixed income equivalents (2) the peak in the bond market heralded another leg up in the value of the dollar and a peak on Wall Street.
To justify the sort of rally that we have seen in bond prices, one would have to believe that deflation is just around the corner. Although many indicators are flagging some sort of economic slowdown, it is hard to believe that the economy is in serious trouble. Even if it were, the Federal Reserve has demonstrated its ability and willingness to turn the economy around with easier monetary policy. We would only be really worried if inflation was making a big comeback and that is not happening (yet).
We expect the rally in bond prices to be reversed once the short squeeze has run its course (i.e. investor sentiment has made the full transition from bearish' to bullish'). This should be the cue for a peak in Western (and possibly Eastern) stockmarkets and a stronger dollar. However, we are not there yet. Indeed, we only appear to have reached point (1) highlighted above.
What does this all mean for strategy?
Although fixed income bond prices are probably close to a peak, inflation-linked bonds (which have lagged for the past 2-3 months) are starting to move higher. We have therefore switched some of our short-dated US bond positions into slightly longer-dated US inflation-linked bonds. However, the overall thrust of bond strategy remains defensive.
The Asset Management equity weighting remains high at 42% but it is likely to be reduced in the next few weeks, particularly in America and Europe .
We took profits on most of our dollar positions a little while ago. We were a little early but we are increasingly confident that a correction is in the wings. Indeed, we are looking for an opportunity to exit our remaining positions. European currencies look the best bet for the next few weeks.
Gold has performed poorly recently but a significant bounce is expected in the not-too-distant future. We intend to use this window of opportunity to sell our gold shares.
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Ashburton bond and equity comment - 28 Jan 2005
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Friday, 4 February 2005
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General Market Analysis
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A period of consolidation was apparent for the US bond market after a strong previous week. However, Q4 GDP in the US printed a lower than expected increase on Friday and caused the dollar to lose ground and pushed US 10 year yields lower. The US indices recorded their first rise on the week this year. However, the advance was distinctly tepid with both the S&P and Dow rising some 0.30%. Whilst the earnings season has seen a number of high profile disappointments, the overall picture has generally been positive with up to two thirds of companies beating analysts' expectations. Asian stock markets had a generally positive week, with economic data across the region better than expected. Japanese data over the week was mostly better, with unemployment figures recovering. Interestingly, China is now Japan's biggest trading partner, overtaking the US. Elsewhere, new all time market highs were hit in Australia and Indonesia. During the first part of the week, the European bourses remained positive, the rally being led by the technology sector, which benefited from better than expected Nokia figures. In addition, the industrial sector (with Philips beating forecasts and announcing a share buy back) also made good headway. However, some slightly disappointing corporate news at the end of the week, together with a little nervousness pre the Iraq elections, gave the excuse for profit-taking. The index gave up much of the gains but still finished up 1.2% on the week so the sentiment remained fairly bullish.
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Ashburton bond and equity comment - 21 Jan 2005
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Thursday, 27 January 2005
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General Market Analysis
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US bonds had a strong week causing the 10 year yield to fall towards the 4.15% level. Elsewhere in the currency markets, choppy trading was evident for the US dollar as it strengthened against the euro but lost ground versus the pound. A continuation of the rise in oil prices and a disappointing manufacturing survey increased investor concerns over the outlook for the US economy and there was a broad based decline on the week. In addition, despite earnings largely beating expectations, the negative reaction to companies missing numbers, or failing to provide a positive forecast has been severe, with high profile names such as Ebay and Qualcomm being sold off particularly sharply. The Tokyo market experienced a bout of profit taking as investors sold in response to profit taking and US equity weakness. However, on a more positive note, the downside looks limited as the domestic funds remain active in the market. In Asia, the Philippines market broke out technically on the better than expected 2004 budget deficit and positive comments from President Gloria Arroyo. Elsewhere, the Hong Kong market has broken technical levels and looks set to test the 13,000 level. The European markets drifted lower this week, led by the large cap stocks and, in particular, technology and consumer cyclical stocks. There was strength emanating from the oil, mining and construction sectors. The French witnessed an unexpected fifth consecutive month of consumer spending improvements, with the consumer benefiting from cuts in inheritance tax and permitted early withdrawals from employee-savings accounts. Nevertheless, the UK saw retail sales slump as stores reported their worst December in almost 25 years, further evidence that last years rate hikes have bitten.
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Investment view changes 14 Jan 2005
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Thursday, 20 January 2005
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General Market Analysis
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Core View
Phase two of the equity bear market is almost complete
It is our belief that Western equity markets are following the typical post-bubble pattern: a sharp fall followed by a long period of range trading. Phase one of the US equity bear market finished in October 2002. Europe duly followed suit in March 2003. The second (recovery) phase is nearly complete. The third phase (in which Western equity markets will experience a meaningful correction) is expected to get underway some time during the first quarter of 2005. Our best guess at this early stage is that phase four (the next major rise) will begin in the third quarter of 2005.
Last modified: 14 January 2005
This economic recovery will run and run
The current global growth cycle is expected to rumble on for several years to come, with Asia the locomotive, Europe the laggard and America somewhere in between. 2005 should prove to be a year of steady, if unspectacular, growth.
Last modified: 14 January 2005
The long-term inflation threat
Global spare capacity is slowly being eroded by the ongoing growth cycle. Deflation is finally loosening its grip on the Japanese economy. The economic development of China is putting upward pressure on commodity prices. Demographic trends in the West should mean more power for Trade Unions and more government borrowing. Inflation is unlikely to be much of an issue in the near term but clouds are gathering on the far horizon.
Last modified: 14 January 2005
Geographical Picture
Is America about to slam on the brakes?
The bad news is the Federal Reserve has started to talk tougher on interest rates, not so much because they are worried about inflation, but rather because they are worried about speculation. The rate at which US interest rates rise may be about to accelerate. The good news is that interest rates are unlikely to go up elsewhere. Indeed, they may even fall in UK/Australia (shaky property markets) and Europe (falling inflation).
Last modified: 14 January 2005
The American bubble economy
Alan Greenspan has rescued the US economy in the bursting of the NASDAQ bubble by creating a whole range of other mini-bubbles - bonds, high yield debt, the NASDAQ (again) and property. They are becoming worried about the level of speculation and may be about to do something about it (see Is America about to slam on the breaks?). However, they will soon back down if the markets fall too much. This policy of 'rotating bubbles' can continue indefinitely unless/until inflation rears its ugly head.
Last modified: 14 January 2005
The economic outlook for Asia is set fair
Asia is finally allowing its currencies to appreciate versus the US dollar. This is great news for inflation and will ultimately be great news for the Asian consumer. China continues to drag its feet but this should change once speculation regarding a Renminbi revaluation has died down.
Last modified: 14 January 2005
Europe needs to reform but progress will be slow
For many and varied reasons, Europe is something of a global under-achiever. Economic reform is required at almost every level. Unfortunately it is unlikely to be forthcoming any time soon. Europe is roughly where Japan was in the mid 1990's - the private sector is starting to grasp the nettle but the voting public remains very complacent and politicians have no stomach for reform. It will take a long period of poor economic performance before the electorate 'gets it' and votes for change.
Last modified: 14 January 2005
6 - 12 Month Market Outlook
The US dollar has turned the corner
In December, all the preconditions for a low in the dollar were in place - it was oversold, unloved and cheap (versus the euro and the pound). It has since bounced back sharply and we now believe that the trend is up (subject to short-term corrections) for the next 6-9 months. This move should take the euro back down to $1.17-1.20 and the pound to $1.75-1.78.
Last modified: 14 January 2005
Stockmarket risks are building
The bad news is that Wall Street is looking increasingly exposed - the dollar is recovering and interest rate risks are on the rise. Europe is insulated by its better interest rate outlook but has historically been particularly vulnerable to collateral damage from a falling US equity market. Japan is the one major equity market that looks capable of rising during this difficult phase for equities. The good news is that, on our models, the downside risks for equities are limited by stable inflation and cheap valuations.
Last modified: 14 January 2005
Bonds are heading for a fall
Bonds have exceeded our expectations during the past three months. However, this all looks set to change in the weeks ahead. The Federal Reserve is talking tough on interest rates; the Nikkei has broken higher (global bond yields correlate quite closely with the Nikkei) and the dollar is recovering (the weak dollar was a major cause of the bond market overshoot in December). The next big buying opportunity in bonds is expected in second quarter of 2005.
Last modified: 14 January 2005
Negative on gold
Gold achieved our minimum target range ($440-450) in December and has since corrected as the dollar has recovered. The chances are that gold has seen its high for the time being. However, gold is ahead of the game (it peaked before the dollar bottomed) and is becoming oversold and a short-term recovery is expected before the downtrend resumes. We remain positive from a long-term perspective.
Last modified: 14 January 2005
Preferences - Equities
Japan is the best equity market
The Japanese stockmarket lagged behind the other major markets in the fourth quarter of 2004 but is now catching up fast. Valuations are cheap, the technical picture looks great and the evidence suggests that deflation is now on its way out.
Last modified: 14 January 2005
Preferences - Bonds
The best of a bad lot
We are currently negative on bonds. Nevertheless, we believe that short-dated New Zealand and US bonds are the best of a bad lot. Both are relatively oversold and should outperform in the event of a broad bond market sell-off.
Last modified: 14 January 2005
Preferences - Currencies
The yen and US dollar are the preferred currencies
Our favoured currencies for the first half of 2005 are the dollar (see "The dollar has turned the corner") and the yen. Of the two, the yen is our favoured long-term bet (cheap, backed by a large current account surplus, end to deflation in Japan). However, its upside versus the dollar is limited in the near term by the fact that the Chinese currency (the Renminbi) remains anchored to the dollar. Both currencies look to have bottomed versus the overvalued euro.
Last modified: 14 January 2005
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Ashburton bond and equity comment - 14 Jan 2005
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Wednesday, 19 January 2005
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General Market Analysis
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The yen was particularly strong against most of the major currencies after the European Central Bank (ECB) commented last week that Asian nations must let their currencies rise in order to shrink the US trade gap. In the equity markets, US indices ended the week slightly lower as a surging oil price renewed concern that higher energy costs will slow economic and profit growth. The fourth quarter earnings season started brightly as semiconductor giant Intel reported ahead of expectations and guided higher but, generally, corporate news was mixed. There was little support from November's trade deficit figure which reached a new record. Better news came late in the week from strong gains in retail sales and industrial production. December PPI also dropped a sharp 0.7%, countering concerns that underlying rate of inflation is increasing. Oil and steel stocks were the top performers on the week. Japanese markets finished the week in a positive tone following much better-than-expected November machinery tool numbers and positive real estate data, leading to frantic buying of cyclical machinery and real estate stocks. Elsewhere in Asia, Thailand continued its recent renaissance whilst Korea decisively broke higher following upbeat earnings guidance from Samsung electronics. European markets drifted lower this week, led down by technology, insurance and telecoms. Germany saw a surprisingly buoyant sentiment number for industrial outlook, as growth in 2004 hit 1.7% (a high since 2000). France, however, witnessed stagnating industrial production and stable inflation (2% for 2004). UK factory production unexpectedly fell for the fifth month out of six. A rally in raw material costs and stalling demand from Europe sent manufacturing to the brink of recession and brings downside risk to GDP. Both the BOE and ECB, predictably, left rates unchanged.
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Ashburton bond and equity comment - 31 Dec 2004
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Thursday, 6 January 2005
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General Market Analysis
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During the shortened Christmas holiday week, US treasuries strengthened slightly and pushed yields lower. On the currency front, the dollar traded sideways into the new year against the euro and pound but lost ground versus the yen. US equity indices finished the week largely unchanged amid light volumes as investors took vacation leave during the holiday season. Stocks rallied into the mid-week following the highest consumer confidence reading since July, boosting retailers such as Wal-Mart. However, despite a better-than-expected jobless claims report, the S&P and Dow gave up their gains as China announced it will limit deliveries of commercial aircraft, news of which sent the Industrial sector lower. The Japanese market finished the year on a high for the fourth quarter of 2004 despite a mixed set of recent economic data. The festive retail season looks to have been average on historic standards but sentiment appears to be on the up again. In Asia, most markets ended the year firmly but the most shocking news was the Tsunami hitting Thailand, India, Indonesia and the surrounding islands. The horrific disaster has hit many people hard and the implications will be felt well into 2005. With many of the European markets having extended holidays the indices were virtually unchanged on extremely light volume. On the political front the election of Victor Yushchenko in the Ukrainian presidential race without bloodshed was a calming influence for emerging Europe.
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Ashburton bond and equity comment - 24 Dec 2004
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Friday, 31 December 2004
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General Market Analysis
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US stocks rose in a shortened holiday week after several government reports suggested economic growth may continue into next year, with the S&P and Dow hitting their highest level in three years. Solid durable goods orders led to out-performance from Industrial stocks. Intel led semiconductor shares higher after it was upgraded by several analysts. The 'Santa Claus' rally, which the Pan European markets enjoyed over recent weeks, fizzled out as many investors opted to take an early Christmas break. The sectors that received some interest were Italian banks (takeover speculation) and oil shares (despite the weak oil price). The Japanese market enjoyed its longest winning streak in almost three months going into the festive season. The big blue chip exporters have expressed their confidence in the outlook after recent positive reports out of the US. The major financials have lead the index higher as the market starts to correct recent under performance. Meanwhile, Asian markets have suffered as investors switched into the US market for the traditional year end rally. Malaysia and the Philippines, in particular, have experienced profit taking after a good year. Bonds were largely unchanged in light trading volumes.
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Ashburton bond and equity comment - 17 Dec 2004
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Wednesday, 29 December 2004
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General Market Analysis
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US treasuries came under selling pressure last week pushing 10 year yields higher, whilst the US dollar had a volatile week and proceeded to give up most of the short-term strength seen of late. US indices advanced as a number of successful new issues and increased M&A activity led markets higher. Stocks rose even as crude oil-prices had their biggest weekly gain in five years and the Federal Reserve raised interest rates a further 25bps (to 2.25%). Oil and commodity stocks outperformed as investors worried about disruption to supplies in the Middle East, together with a colder snap of weather in the States. Earnings news was generally mixed, with retailers and brokers beating expectations, whilst technology company reports disappointed. Japanese markets closed the week higher following the mid-week Tankan BOJ survey that came largely in line with expectations. The banking and blue chip stocks led the markets higher, following a slight weakening of the yen and realization that the reaction to recent poor economic data has been overdone. Elsewhere in Asia, China reported a rise in liquidity that bodes well for growth into 2005. European equity markets finished slightly firmer on the week, helped by some reasonable economic data, in particular the German Ifo which was much stronger than anticipated. Financials performed well due to several takeover situations. Danske bank purchased two smaller Irish banks and the London Stock Exchange also received a bid approach. However, much stronger gains failed to materialise due to a weak pharmaceutical sector, which was rocked by the apparent trial failure of several potential blockbuster drugs.
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Ashburton bond and equity comment - 6 Dec 2004
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Wednesday, 8 December 2004
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General Market Analysis
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The weaker than expected new job creation figures released on Friday provided impetus for the bond market: US treasuries rallied, pushing 10 year yields lower towards the 4.25% level and put further pressure on the US dollar. However, with the market already very short, a dollar rally initiated from short covering could well be likely. US equity indices were lifted and ended the week higher, following a sharp reversal in the oil price mid-week and an upbeat sales forecast from Intel. Economic data was broadly positive with Q3 GDP and October manufacturing data stronger than expected, although Friday's jobless figures were disappointing. The unexpected determination in the Japanese industrial production and other economic indicators put pressure on the Nikkei which fell lower. The index then recovered on the back of the yen, halting its appreciation (and US equities advancing) and finished the week virtually unchanged. However, the recent conservative earnings estimates of companies indicate the outlook for next year does not factor in the favourable earnings and, hence, there is scope for surprise on the upside. In Asia, Thailand was mildly strong on the improved outlook for the banks and the lack of further violence in the South. Taiwan was also strong on the week as the MSCI rebalance of the index has come to an end and the attractive fundamentals are starting to drive the market. The European equity markets finished slightly better on the week but faced conflicting news. On the one hand, the steepest ever two day fall in the oil price boosted hopes for the global recovery, whilst the continuing weakness of the dollar is a worrying trend for the European exporters. Poor US car sale numbers also added further pressure to the auto sector. As expected, the ECB once again left rates unchanged. Whilst they remain concerned about inflation, the current strength of the Euro does not allow for any interest rate increases.
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Ashburton Strategy Note 1 Dec 2004
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Friday, 3 December 2004
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General Market Analysis
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Buying the US dollar
Slowly but surely the pieces are falling into place for a dollar recovery. Not only is it heavily oversold on our technical models, but also it is as cheap today versus the euro and the pound as it has been at any time during the past 30 or 40 years. Furthermore, investors are now incredibly negative (which is positive from a contrary point of view). This pessimism might seem well-founded. After all, the US current account deficit is still large by historical standards and Alan Greenspan has recently told us that the deficit is a problem for the markets. However, consider these points:
1. There are long lead times between currency weakness and an improving
current account position - it could well turn out that the markets are getting in a flap about the deficit just as it is about to start shrinking.
2. Although Asia is clearly more comfortable with the weak dollar, there are probably limits as to how far they will let their currencies appreciate in the near term. At the same time Europe is probably reaching its pain threshold with regard to the strong euro. If both Asia and Europe start intervening to support the dollar, there is only one way it can go and that's up.
3. Alan Greenspan is revered by the markets and so when he says the current account deficit is a problem, investors sit up and take notice. However, his track record is far from perfect. For instance, he effectively endorsed the consensus view on the so-called new economy' just as the NASDAQ bubble was entering its final stages. Alan Greenspan may be the finest central banker in the world, but he's still only human.
The bottom-line is that the consensus view on the dollar is now firmly negative, due in no small part to Greenspan's pronouncements on the subject. However, history shows that although the consensus view can hold sway for a while, it is almost always proved wrong in the fullness of time. We therefore expect the dollar to start recovering soon. With this in mind, we have shifted strategy, introducing a 10% weighting in the US dollar to our sterling and euro-based services (ultimate target: 30%) and reducing our sterling/euro exposure by 10% in our dollar-based services (ultimate target: zero). We are probably a little early in our timing, but we suspect that the final move higher will be pretty sharp and will be reversed just as quickly. We would prefer to put down our first marker early rather than miss the opportunity altogether.
Buying more US bonds
Last week we switched our Canadian bond holdings into short-dated US bonds. This week we have bought more short-dated US bonds, this time against a sale of one of our New Zealand government bond positions. The reasoning behind this shift is similar to those behind the Canada switch: US bonds are oversold on a relative basis, are cheaper to currency hedge and should outperform in the event of a dollar recovery. We still like New Zealand bonds and expect them to outperform most other markets if bond prices generally fall (as we expect).
Bonds: Switching Canada into United States
We turned negative on bonds around three months ago. Since that time we have maintained a defensive tone to bond strategy, sticking to short-dated bonds and cash. Geographically, we have favoured the bond markets of New Zealand and Canada, which looked the most attractive on our models.
The weak US dollar has recently had a major impact on global bond markets, pushing up yields in America and down virtually everywhere else. The Canadian bond market has been one of the better performing markets during this period, particularly on a currency hedged basis. Indeed, the yield gap between Canadian and US bonds has now dropped virtually to zero, having been around 65 basis points back in October.
However, the scope for further outperformance by the Canadian bond market looks fairly limited. Firstly, it is no longer the most oversold on our models (that honour now rests with the US bond market). Secondly, we believe that the US dollar is approaching a low of some significance and on recovery would almost certainly lead to a reversal of recent flows (i.e. back into short-dated US Treasuries out of other bond markets). As a result, we have taken profits on our Canadian bond holdings, replacing them with short-dated US bonds. An added advantage of this switch is that the US dollar is cheaper than the Canadian dollar to hedge' (versus the euro and the pound).
To repeat, we believe that the US dollar is on the verge of a 6-12 month recovery versus the euro and the pound. Not only is it very oversold, but investor sentiment is incredibly negative (which is positive from a contrary point of view). We are therefore looking for an opportunity to buy US dollars for our sterling and euro-based services and to take profits on the pound for our dollar-based services.
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Investment view changes 23 Nov 2004
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Thursday, 2 December 2004
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General Market Analysis
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Core View
The interest rate cycle has turned
Interest rates have either started to rise (or are about to do so) in much of the developed world. The strong euro has raised the possibility of one last rate cut in Europe but the more likely outcome is a long period of low, stable interest rates.
Phase two of the equity bear market is almost complete
It is our belief that Western equity markets are following the typical post-bubble pattern: a sharp fall followed by a long period of range trading. The first phase of the equity bear market finished on Wall Street in October 2002. Europe duly followed suit in March 2003. The second (recovery) phase is nearly complete. The third phase (in which Western equity markets will revisit the low end of the trading range) is now expected to get underway early in 2005.
6 - 12 Month Market Outlook
A buying opportunity in the US dollar is at hand
Our last word on the US dollar (written on 5 October) was negative. Since that time, it has weakened considerably (now down around 5-6% against most of the major currencies) as the focus has shifted to the large US current account deficit. Although we remain negative about the near term outlook, we feel that a buying opportunity is at hand - investors are incredibly negative and the US dollar is becoming heavily oversold.
Equities to remain well supported into the year end
At the end of September, we predicted that most stockmarkets would hit new highs for this cycle in the fourth quarter. Thus far things have gone roughly according to plan. Most markets have risen and the world index has recently hit its highest level since it bottomed in March 2003. We expect more of the same in the next few weeks. The Presidential election is now behind us and there are tentative signs that the American growth pause' may be coming to an end. Furthermore, the weak US dollar is pressurizing Europe and Asia to ease policy. Japan has lagged recently but it is now so oversold relative to its Asian counterparts that a period of catch-up' should soon follow.
Bonds are heading for a fall
Three months ago, we said that the bond recovery has largely run its course. Since then we have been frustrated by the continued rise in the JP Morgan Global Bond Index (up 1.8% in local currency terms since 31 August). However, we continue to retain our negative view. The significant gap that has opened up on the charts between (rising) commodity prices and (falling) bond yields remains a major concern. Furthermore, our optimism on equities argues for pessimism on bonds. Whilst US bond prices are already off their recent highs; other markets are being supported by the weak US dollar (i.e. strong euro, strong yen, strong Canadian dollar and so forth). This is unlikely to last for much longer either the US dollar will recover or the authorities will be forced to ease policy (cut rates, spend money or intervene in the currency markets). Either way, the end result will be bond negative.
Still positive on gold
We expressed a positive view on gold in June (then $393) and again in August (then $406). The gold price currently stands at $449. With the US dollar expected to weaken further in the near term, we remain positive. However, it has now achieved our minimum price objective and we are starting to look for an appropriate exit point. An explosive rise in gold shares should give us the first clue that the uptrend in gold is entering its terminal phase for this cycle (we remain bullish with regard to the long term outlook for gold).
Preferences - Equities
Asian equities are the pick of the bunch
America has a strong economy with a fully valued equity market. Europe has a lacklustre economy with cheap equity markets. Asia , with its strong economy and cheap equity markets, stands out as the most attractive region. Furthermore, it has demographics on its side, deflation is ending in Japan and the Asian consumer is emerging as a major force in the global economy.
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Ashburton bond and equity comment - 26 Nov 2004
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Thursday, 2 December 2004
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General Market Analysis
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The US dollar saw intense volatility during trading last week and ended lower against most of the major currencies culminating in the gold price testing the $450 level. US 10 year treasury yields were also forced higher on concern that overseas investors will reduce their holdings of the securities amid the dollar's decline. Despite the weaker dollar and firmer oil prices, the US equity Indices recorded a respectable increase over the week, with small cap stocks particularly strong. The Thanksgiving week was quiet on the earnings front, although there was some positive job data and new home sales recorded their third highest pace on record. Investors reacted positively to this news and there is growing hope that the US economy can continue to sustain its momentum. Unsurprisingly, after a quiet pre-holiday US session and, with very little in terms of fresh news flow, a thin, range bound market was about as good as it was going to get. The Asian countries still continue to out-perform Japan on a relative basis - Indonesia and Sri Lanka in particular, have turned in a dazzling performance. The disappointing Taiwan market dragged Asia lower as the electronic companies experienced volatility across the board on pricing demand and over supply. European markets recovered at the end of the week in the face of the weaker US dollar. The Russian Central Bank's talk of changing their reserve structure and boosting its Euro reserves at the expense of the US dollar, sent the euro ever higher. The currency continues to weigh on the commercial prospects of companies exposed it, as witnessed by yet another poor German's IFO (survey of business climate) number.
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Ashburton bond and equity comment - 19 Nov 2004
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Wednesday, 24 November 2004
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General Market Analysis
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The US dollar came under pressure towards the end of last week as Fed Chairman, Alan Greenspan, warned that dollar-denominated assets will lose appeal to foreign investors over time. The dollar, therefore, lost ground against most of the major currencies and this also pushed the gold price to further new highs. Amid concern the Federal Reserve may raise interest rates into 2005, the S&P index declined for the first week in four. Greenspan's hawkish comments on both monetary policy and the record duel deficits were poorly received and inflation concerns resurfaced as the core PPI figure increased for a second successive month (+0.3%). The Tokyo market reacted to US equity strength with gains at the start of last week - the Nikkei average passed 11,200 for the first time since 12 Oct and the 200-day moving average also recovered. It then lost ground as the yen appreciated to the YEN103/USD level, finishing the week close to its initial position. Despite the fact that Moody's raised the outlook for the top four Japanese banks, the market still continues to under-perform Asia. In contrast, the Asian countries continue to perform relatively well as investors seek laggards in countries such as Indonesia. Despite the implications of record US dollar lows versus the Euro for European corporate earnings, there was no mass selling of stocks and the FTSE Euro top 300 only fell by 0.5%. This was despite the pharmaceutical sector falling 4% on further questions regarding the FDA approval of five key industrial drugs. The financial sector, with the first hard news involving cross-border takeover activity, performed strongly and counter balanced the weak performance of pharmaceuticals.
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Ashburton bond and equity comment - 29 Oct 2004
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Thursday, 4 November 2004
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General Market Analysis
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US indices pushed higher this week due largely to a 6% decline in the oil price. Insurance stocks led the rally on optimism that Marsh McLennan's response to claims of kickbacks and rigged bids will help resolve Spitzer's investigation. Investor optimism was tempered by weaker than expected third quarter GDP figures and China's decision to lift interest rates for the first time in nine years. Despite reasonable news on the earnings front, the Japanese equity market experienced another week of mild losses with corporate scandals, earthquakes and the China interest rate decision dogging sentiment. European equity markets closed higher on the week, despite some of the Asian exporters being hit by the Chinese interest rate hike. As the lower oil price inspired a switch back to equities, Bond prices drifted lower.
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Ashburton bond and equity comment - 22 Oct 2004
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Monday, 1 November 2004
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General Market Analysis
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US treasuries rose just minutes after the Federal Reserve's October meeting showed that policy-makers were concerned about the lack of job creation, suggesting they may not raise interest rates as fast as originally forecast. This undermined the US dollar, which ended the week lower against most of the major currencies. Equities were generally lower, with disappointing profits figures and the high oil price weighing on sentiment. The NASDAQ bucked the trend, recording a modest gain thanks to solid earnings reports from a number of internet groups. Sentiment in Japan was further undermined by the strong yen and various accounting scandals. The Thai market was the only gainer in Asia on the back of positive banking results. Economic data in China was generally stronger than expected. European markets were roughly unchanged, as the weakness in Basic Materials was balanced by strength in the Chemicals and Telecoms sectors. Euro-zone area inflation slowed to 2.1% in September. European Industrial Output fell, as did the price of manufactured goods in France. All these factors point to the fact that, despite rising costs due to the increasing oil price, industry is unable to pass these costs to the consumer.
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Ashburton bond and equity comment - 15 Oct 2004
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Thursday, 21 October 2004
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General Market Analysis
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Higher than expected weekly jobless claims coupled with widening trade deficit in the US, provided support for treasuries last week which pushed 10 year yields lower towards the 4% level. In the currency markets, the pound was lifted against the US dollar by the BoE's hawkish comments inferring that UK rates have not peaked - however it still continued to lose ground versus the strong euro. In the equity markets, US indices fell as record oil prices renewed concern that higher energy costs will slow economic and profit growth. Crude reached US$55 after the Energy Department showed US supplies of distillate fuels declined. The decline in benchmark indexes was limited by a better-than-expected Retail Sales figure (+1.5% vs. +0.7%). In the Japanese market, the fundamentals still remain sturdy on the economic front. However, the over reaction by investors to current weakness in commodity prices meant the index was disappointingly down on the week. The oil sector was oversold on a combination of an impending IPO and a slightly weak oil price. Not surprisingly most of the stocks linked to commodities, in particular the steel industry, suffered a bout of profit taking. China, Korea and Thailand suffered the worst on the week as investors panicked and questioned the sustainability of the commodity story. This also led to profit taking in Europe with the Basic Materials sector down 5% and consequently pushed the European markets lower. The German ZEW number was at its lowest level in 16 months, which meant that industrial outlook assumptions were much weaker than expected. French industrial output for August was also poorer than expected and fell to its lowest level since May 2003. Ultimately, the effects of a high oil price appear to be biting!
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Ashburton bond and equity comment - 8 Oct 2004
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Wednesday, 13 October 2004
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General Market Analysis
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Disappointing new job figures in the US on Friday (96,000 actual versus 148,000 expected) caused a modest short-covering rally in treasuries which drove the 10 year yield lower from 4.25% to 4.15%. This did not help the US dollar, which weakened across most of the major currencies and also pushed the gold price to a six month high. The pullback in US indices was not surprising given a series of negative developments. A fourth-straight day of record oil prices (8% spike in crude), the slowing employment growth data and generally disappointing corporate news all took their toll. The NASDAQ gave back some of its earlier out-performance whilst the rally in gold made gold stocks one of the best performing sectors. The Japanese index was up positively on the week on the back of noteworthy returns in mining, as well as oil & coal products. The fact that commodity prices have been rising across the board, rather than just crude oil prices, points to a more solid global economy than previously thought. Despite mixed markets over the week, the strong sentiment in Asia continued. Once again, the commodity driven economies, such as Australia, showed pockets of strength over the week. The European market was led higher by Basic Materials and Energy (rising 1.3% and 1.25% respectively) as Brent Crude moved towards the $50/bbl. Both the ECB and the UK left rates unchanged. Considering the move in the oil price, the ECB remains cautious on the economic outlook. They are, however, confident that price inflation is under control. Germany witnessed a rise in its unemployment rate to 10.7% as factory orders and industrial production slipped.
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Investment view changes 5 Oct 2004
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Thursday, 7 October 2004
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General Market Analysis
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Core View - Phase two of the equity bear market is almost complete
It is Ashburton's belief that Western equity markets are following the typical post-bubble pattern: a sharp fall followed by a long period of range trading. The first phase of the equity bear market finished on Wall Street in October 2002. Europe duly followed suit in March 2003. The second (recovery) phase is nearly complete. The third phase (in which Western equity markets will revisit the low end of the trading range) is expected to get underway late in 2004 or early 2005.
Core View - This economic recovery will run and run
The current global growth cycle is expected to rumble on for several years to come. It will not, however, be evenly spread and it certainly won't be without its hiccups. Europe is a clear laggard. The American economy is doing pretty well but should experience something of a slowdown next year. Meanwhile China continues to grow strongly, defying gloomy predictions of a hard landing'.
Geographical Picture - The authorities are starting to apply the brakes
The bad news is that inflation has bottomed and the authorities are starting to ease back on the policy throttle. The good news is that policy is unlikely to turn restrictive for some time to come. Greenspan is still worried about deflation and will drag his feet on interest rates. The European economy is still pretty flat and the ECB will be reluctant to tighten policy aggressively - despite the fact that inflation is now above its ceiling level. The Chinese economy continues to grow strongly but there is little evidence of a serious inflation problem.
Geographical Picture - The economic outlook for Asia is set fair
As a result of its currency intervention policies, Asia is awash with liquidity and is growing strongly. There were concerns that the Chinese economy was overheating but these are fading thanks to the authorities' earlier efforts to rein in growth and slowing food price inflation. The main threat to Asia is actually external rather than internal - the American economy and its many imbalances - but even on this front, we feel there is little to worry about in the near term.
6-12 Month Market Outlook - We remain wary of the dollar
Understanding the past is crucial to forecasting the future. The dollar ignored the recent fall in bond yields and therefore should not gain support from a rise in bond yields going forward. The correlation between equities and the dollar has been negative recently and hence, if equities continue to recover (as we expect), this may be bad news for the dollar. In summary, the overall environment that we foresee is probably dollar-negative. Throw in the sizeable current account deficit and one can only conclude that the dollar is more likely to go down than up.
6-12 Month Market Outlook - Equities set to hit new highs for this cycle in the period ahead
As long ago as the fourth quarter of last year, we warned that interest rates were bottoming and that this would be the cause of wobbles on Wall Street'. However, we also predicted that stockmarkets would ultimately hit new highs in 2004. Although it is fair to say that we didn't envisage the corrective phase lasting quite as long as it has, essentially events have conformed to our expectations. Despite the elevated oil price, equity markets have entered the fourth quarter at a gallop. Some indices have already hit new highs for this cycle. The rest shouldn't be too far behind.
Preferences - Equities - Asian equities are the pick of the bunch
America has a strong economy with a fully valued equity market. Europe has a lacklustre economy with cheap equity markets. Asia , with its strong economy and cheap equity markets, stands out as the most attractive region. In addition, it looks like Japan 's long period of economic stagnation is at an end and the Asian consumer is gradually emerging as a major player in the global economy.
Asian equities have outperformed their American and European equivalents in the period since SARS faded into the background in 2003. However, it has found the going rather tougher since April thanks to an unhelpful combination of rising US bond yields, a high oil price and concerns regarding the outlook for the Chinese economy. These negatives have started to dissipate and Asian equities have started to outperform once more. Expect more of the same in the months ahead.
Preferences - Equities - Optimism on European equities
There are several reasons why we expect European equities to outperform Wall Street in the period ahead. Firstly, thanks to rising property prices, a loosening of the fiscal straightjacket (the Stability & Growth Pact) and improving export markets, Europe is starting to outperform investors' (low) expectations. Secondly, European valuations are more attractive and thirdly, Europe has tended to outperform during periods of rising equity markets.
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Ashburton Strategy Note
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Thursday, 7 October 2004
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General Market Analysis
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Switching Australian dollars back into pounds
Ashburton switched the pound into the Australian dollar at a rate of 2.63 on 10 June. At that time, the Australian dollar was heavily out of favour and the most oversold currency on Ashburton's model. In the months that have followed, the rate has moved in Ashburton's favour as the Australian dollar has recovered (rising commodity prices and better economic news) and the pound has weakened (topping property market and expectations of lower interest rates). Although it seems likely that the Australian dollar will remain well underpinned by rising commodity prices, Ashburton feel that the easy money has been made, at least versus the pound. Furthermore, the large Australian current account deficit makes Ashburton more than a little nervous as well. The pound is now extremely oversold and the consensus view is pretty negative (which is positive from a contrary point of view). Ashburton have therefore switched the funds position in the Australian dollar back into pounds at a rate of 2.48 for a gain of over 5%.
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Ashburton bond and equity comment - 1 Oct 2004
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Tuesday, 5 October 2004
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General Market Analysis
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US treasuries came under pressure last week which pushed 10 year yields nearer the 4.2% level. In the FX markets, the US dollar had a volatile week but finished stronger versus the pound, which was particularly weak across the board after dovish rate comments from the Monetary Policy Committee. The NASDAQ led US equity markets higher, as investors committed monies to beaten-up semiconductor issues and Dell's CEO reiterated positive guidance. However, the Dow's advance suffered from Merck's shock announcement that it would be withdrawing its blockbuster drug Vioxx from worldwide markets. Basic Materials and Energy stocks outperformed, following broad-based strength in the commodities markets and crude oil rising above USD50. The strong Tankan index prompted buying in the Japanese market after a shortened holiday week. However, the high oil price still seems to be a worry for the market. In Asia, Australia and New Zealand both finished the month at year highs on the back of continued strong commodity demand from China. Philippines and Indonesia have come into their own in the last couple of months, on the back of much improved volume and investor activity. European markets rebounded this week, despite the oil price hitting new highs and a slight decline in the expectations component of the German Ifo figure. A strong housing market appears to be fuelling some French consumer optimism, with consumer confidence rebounding 6 points in spite of deteriorating unemployment numbers (the unemployment number hit 9.9%).
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Ashburton bond and equity comment - 24 Sep 2004
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Friday, 1 October 2004
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General Market Analysis
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The US dollar traded higher at the beginning of the week in anticipation of the FOMC rate decision, which saw a further 25bp hike (as expected) on 21 Sep. However, the dollar soon weakened after the Federal Reserve stated they remained committed to raising interest rates at a "measured" pace. In the bond markets, US 10 year yields ended the week lower and briefly dropped below 4% despite the rate hike by the Fed. In the equity markets, US indices declined amid broad-based selling pressure, as several profit warnings from the consumer staples sector and a new high in the oil price exacerbated concerns about the impact on economic growth. Energy issues outperformed as crude climbed sharply, following a drop in stockpiles and fears of supply disruptions caused by hurricane Ivan. The sentiment and economic indicators remain weak in Japan over a shortened week of holidays. The rest of Asia has started to outperform the Japanese market on the back of firming commodity prices heading into the seasonally strong fourth quarter. The Philippines market had an encouraging week after the investors returned to active buying with good volume. In Europe, the markets gave up nearly 1% as crude oil broke through the USD44 mark, as concern over shortages translated into higher prices. Consequently, energy stocks performed well, whilst cyclicals and chemical stocks were among the worst to suffer. France released figures that indicated spending on manufactured products had slowed in July and August and Germany's inflation rate fell below 2% in September.
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Ashburton bond and equity comment - 17 Sep 2004
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Wednesday, 22 September 2004
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General Market Analysis
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US 10 year yields hit a five month low last week as the core CPI only increased slightly and on the currency front, sterling rebounded after stronger than expected UK retail sales data. In the equity markets, investors drove the US indices higher, (with the exception of the Dow Jones) - which was dragged lower by Coca Cola's earnings warning. Oil prices remained firm as Hurricane Ivan effectively shutdown the Gulf of Mexico's production capacity and this led to further out performance from the energy sector. The Japanese market was flat on the week after a mixed previous week. In Asia, the domestic Chinese market was very strong as Jiang Zemin stepped down from his military post in addition to the Vice President stating there was no further need for tightening on the economy. European markets had a positive week led higher by Basic Materials (particularly steel), TMT and transportation stocks. Long term interest rates eased (ending the week at 4.06% - their lowest rate since April 04), which helped to off-set some of the poor figures that were released during the week. The German ZEW (confidence survey in the financial sector), fell 6.9 points, below consensus, which is its steepest decline since April 04.
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Ashburton bond and equity comment - 10 Sep 2004
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Tuesday, 14 September 2004
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General Market Analysis
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Bonds were relatively flat on the week, whilst in the currency markets the strong US dollar seen of late had a significant reversal and ended the week lower against most of the major currencies. US equity markets drifted higher in a shortened holiday week, as a drop in oil prices eased the concern that corporate profits this year may be weaker than expected. Technology shares led the advance, as beaten-down semiconductor issues rallied from oversold conditions and Nokia made upward revisions to third quarter sales and EPS. A declaration from Fed Chairman Greenspan that the economy is ‘gaining traction’ and an inflation-friendly PPI report gave investors further cause for optimism. Outside of the US, Japanese equity markets ended on a low note following a highly erratic week of domestic macro data. The week started higher with much better than expected capital expenditure figures but was then followed by poor machinery orders and GDP data. Elsewhere in the region, Australia hit another all time high and Korea was the stand-out performer as investors are betting that a host of new initiatives from the government to kick-start the economy will work. European markets were relatively flat but the flow was towards the higher risk, high beta areas of technology and telecoms and out of the more defensive areas of utilities and pharmaceuticals. In Euro-land, the Q2 ’04 GDP figures validated the scenario of a demand driven cyclical recovery. In the UK, as expected the BOE, left rates unchanged at
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Ashburton bond and equity comment - 3 Sep 2004
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Tuesday, 7 September 2004
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General Market Analysis
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The Dow and S&P both held steady in light volumes, as investors refused to commit monies ahead of the all important job statistics released on Friday. The report showed good progress on all fronts as employers added 144,000 workers to payrolls during August, unemployment declined (to 5.4%) and wage pressures subsided. The tech-laden NASDAQ finished the week almost 1% lower after semiconductor giant Intel cut its revenue forecast because of slowing demand for PCs and mobile phones. Japanese equity markets fell marginally last week amidst a lack of incentives to push the market higher. On the positive side, volumes have started to pick-up, with Japanese individuals and investment trusts on the buy side. Elsewhere in the region, Australia reached a new all time high driven by a rebound in financial stocks and Malaysia gained following the release of political prisoner Anwar, indicating an end to the 'cronyism' of the previous administration. The European markets continued the recent rally, albeit on very light volume, due to public holidays on both sides of the Atlantic. The slackening in the Eurozone economy was confirmed by the larger than expected fall in PMI indices. The ECB, however, projected a recovery and increased their GDP target by 0.2%. Most sectors were better but the technology sector suffered from the poor forecast from Intel in the US.
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Ashburton bond and equity comment - 20 Aug 2004
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Friday, 3 September 2004
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General Market Analysis
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US indices drifted higher on low volumes, with sentiment bolstered by a lower oil price. Economic reports were mixed with GDP for the second quarter coming in at 2.8% (versus 2.7% expectations) and new home sales that were still suggestive of strength in the housing market. Of some disappointment was Wal-Mart's August sales guidance which may not bode well for the back-to-school selling season. European bourses followed Wall Street's lead, with the Eurotop300 gaining nearly 3%, albeit on extremely low volume. Japan's broad Topix index rose for the 8th consecutive day on Friday, following the lows of last week. Economic data in Japan was once again mixed, but foreign investors and domestic investment trusts were large buyers of the market, following declines in crude oil prices and an increase in risk appetite. Elsewhere in the region, the most notable event was the official confirmation that after 68 months, Hong Kong has finally beaten deflation. Bond markets edged higher, as investors continued to revise down their expectations for US interest rates.
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Ashburton Latest Investment View Changes
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Friday, 3 September 2004
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General Market Analysis
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Core View
The risks to inflation are still skewed to the upside
Inflationary pressures have eased recently as growth conditions have cooled around the world. However, this is no more than a natural pause is an ongoing growth cycle and inflationary pressures should start to build again later in the year.
Month Market Outlook
The bond recovery has largely run its course
The bond bear market (which began in June 2003) has been punctuated by two major recovery phases. The latest recovery (which began in June) has seen the price of the benchmark US 10-year bond rise around 5%. Although there may be a little more upside for bonds in the near-term, the easy money has now been made. Having been extremely oversold, bonds are now becoming overbought. Investor sentiment has gone from being very negative to mildly positive (which is negative from a contrary point of view). Furthermore, bond markets are approaching areas of significant technical resistance. Another worrying factor is the recent divergence between rising commodity prices and falling bond yields. When a similar thing happened earlier this year, the ultimate result was a slump in bond prices.
Bottom line: the bond recovery is at a very late stage.
We remain wary of the dollar
In our last note on the dollar (21 June), we suggested that it was set to revisit the lower end of its recent trading range. In the weeks that have followed, despite a significant downwards revision in interest rate expectations, the dollar has steadfastly resisted investors attempts to push it lower and is now roughly unchanged.
Understanding the past is crucial to forecasting the future. The dollar ignored the recent fall in bond yields and therefore may not gain support from a rise in bond yields going forward. The correlation between equities and the dollar has recently been negative and hence, if equities continue to recover (as we expect), this may be bad news for the dollar. Oil has been a key variable for the markets and looking back, if there is a relationship with the dollar, it is a positive correlation if oil continues to correct (again, as we expect), this may also be bad news for the dollar.
In summary, the overall environment that we foresee is probably dollar-negative. Throw in the sizeable current account deficit and the fact that the dollar is technically overbought and one can only conclude that the dollar is more likely to go down than up.
Still positive on gold
In our last note on gold (21 June), we suggested that the price of gold would rise in the period ahead. Since then, gold (then $393) has risen unsteadily to its current level of $406. We remain positive, given our neutral/negative view on the US dollar and the improved performance of gold shares relative to the metal itself.
Preferences - Bonds
US bonds will lead the way lower
US bonds have a habit of outperforming on the way up and underperforming on the way down. In our last note, we said that bonds were likely to recover in the near-term and that US bonds would outperform for a while. That has now happened. We now expect bond prices to fall and US bonds to underperform. We expect the New Zealand bond market, which has hardly participated in the recovery phase at all, to be the best of a bad bunch.
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Taking defensive action on bonds
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Monday, 30 August 2004
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General Market Analysis
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Our last major change in bond strategy was in May/June when we took advantage of the sharp bond sell-off to rebuild our weightings in anticipation of a recovery. In the weeks that followed, bond prices have indeed bounced back - as a combination of slowing economic growth, better inflation news and lower equity markets reignited buying interest. When we bought bonds, we did so in the belief that any recovery was unlikely to be any more than a temporary recovery in an ongoing downtrend hence our reluctance to move too heavily into bonds.
With this mind, we have been monitoring the situation closely for an opportunity to take profits and to move back into cash. Slowly, but surely, the reasons to hold bonds have melted away: valuations are still very poor by historical standards, investor sentiment is now mildly optimistic (having been extremely pessimistic) and our technical indicators are neutral having been extremely oversold. The economic news has been bond-supportive of late but this is unlikely to last. A key factor in the recent economic slowdown and equity market correction has been the high oil price. Although we expect oil price to hit higher levels over the long-term, we have also been expecting a short-term correction. That now looks to be underway. If we are right and oil is the swing factor for markets, we should now see bonds correct and equities bounce back.
We have made the following changes to bond strategy today:
1. Sold all our exposure US TIPS (inflation-linked bonds)
There are three reasons for this decision. Having topped our valuation/technical tables back in May, the US bond market is now at the bottom of the pack. The US bond market tends to be the most volatile outperforming on the way up and underperforming on the way down and given that we expect the market to fall, the US bond market will not be a good place to be. The recent drop in US consumer prices will mean a low rate of accrual for inflation-linked bonds in October.
2. Bought New Zealand Government Bonds
Bonds in New Zealand have not participated in the global bond market recovery as the Central Bank has talked tough on interest rates. As a result, New Zealand bonds have moved to the top of our technical/valuation tables and, in short, the New Zealand bond market currently looks by far the best of a bad bunch. We have removed all exposure to the New Zealand dollar via currency hedges.
Following these changes (and the earlier sale of the Singapore bond) our bond weightings have been reduced to 30% in Cash & Fixed Income and 18% in Asset Management. In other words, our bond strategy has shifted down several gears from mildly aggressive to defensive.
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Selling Singapore dollars, buying pounds
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Wednesday, 25 August 2004
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General Market Analysis
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Two months ago Ashburton bought a small weighting in the Singapore dollar. To date this position has produced satisfactory, if not stellar results - the Singapore dollar has risen slightly (at least versus the pound and the US dollar) as has the Singapore bond market.
The pound has been one of the weaker currencies of late as evidence of slowing property price inflation has brought about something of a rethink on interest rates. On balance, Ashburton feel that the market has over-reacted and view the recent setback in the pound as an attractive buying opportunity.
Although Ashburton still like Asian currencies from a long-term perspective, they feel that sterling could perform even better in the near term. As well as being the highest yielding G7 currency, it is also the most oversold on Ashburton models. Furthermore, Asian bond markets will be particularly vulnerable if there is a pick-up in growth expectations. Ashburton have therefore taken the decision to sell the funds Singapore bond position, switching the proceeds into a sterling money market instrument.
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Ashburton bond and equity comment - 20 Aug 2004
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Wednesday, 25 August 2004
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General Market Analysis
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US equities bounced solidly off their lows with the three major indices experiencing their biggest weekly gains in several months. Retailers led the advance after a bullish forecast from Home Depot and solid earnings from Staples. Google led technology higher after a successful debut on the NASDAQ. Economic data on the whole was supportive, as good inflation and home sales data eased concerns that higher fuel costs would crimp consumer spending. Basic Materials stocks outperformed on firmer commodity prices and profit-taking was seen in energy. European markets bounced back this week despite the high oil price and a slowdown in Euro zone industrial production. Corporate news was good, however, particularly in the insurance sector, where the effect of hurricane Charley appears to be less than expected. The Japanese Nikkei index finished higher having almost touched its May low earlier in the week. Transaction volumes were light due to the Obon holiday period. In Asia, the technology sector finally experienced a period of relief following several weeks of losses. Bonds were the mirror image of equities rallying early on before selling off to end the week marginally lower.
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Ashburton bond and equity comment - 16 Jul 2004
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Monday, 26 July 2004
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General Market Analysis
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US bonds climbed sharply on Friday due to lower than expected core inflation rate figures (0.1% increase versus 0.2% expected). This pushed US 10-year yields to a 3 month low of 4.35% and saw the US dollar lose ground against most major currencies. In the equity markets, US stocks fell after a disappointing forecast from Intel and poor retail sales data. Although results from heavyweights GE and IBM were positive, they failed to reassure investors and had little market impact. The energy sector was the only major performer as the price of oil increased on concerns that OPEC's revised quota will not meet the high North American demand. The promising merger between two of the top Japanese banks was encouraging news for the reforming process of the banking industry. Otherwise in Japan, the technology sector was hit hard by disappointing outlook from the US and Europe. In Asia, the second quarter figures released out of China show signs of an economic slowdown but still strong growth across most sectors. European markets put in their fourth consecutive down week and were led lower by Technology stocks (most notably Nokia), whilst in France a disappointingly modest increase in business activity did little to lift the markets. Moreover, there was an interesting development in the political wrangling over the stability pact: the European court has decided to go ahead with proceedings against France and Germany for excessive Government deficits.
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Ashburton bond and equity comment - 20 Feb 2004
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Friday, 27 February 2004
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General Market Analysis
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The overriding concern that equities have risen too far too fast over the past year led to a week of consolidation for the US markets. Investors were seen to rotate out of technology issues into the more defensive consumer staples group. Further encouraging comments by the Fed Chairman on the outlook for employment failed to stop the indices easing back, whilst a report showing slightly higher than expected consumer prices was a slightly negative piece of news. A stronger US dollar also led to weaker gold prices and commodity related stocks. The stronger than expected GDP figure illustrated the strength of the recovery in the Japanese economy. However, last week the key driver has been the sharp depreciation of the yen and the positive implications for exporters. Hence the domestic orientated companies experienced profit taking after months of recent strength. In Asia, the steel sector was particularly impressive as the outlook for the prices and the industry were raised - in particular, the Taiwanese steel manufacturers were very strong. Elsewhere, India and Thailand continued to experience profit taking, while Malaysia was strong on the back of the economy performing well. European markets performed well (up 1.8%), despite the headwind from the US. Euroland data showed a slight rise in industrial production in December whilst Germany's future industrial climate forecast (ZEW) crept lower in February and came in below market expectations.
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Ashburton bond and equity comment - 13 Feb 2004
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Friday, 20 February 2004
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General Market Analysis
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Little change on the week was seen by the US markets as a mid-week rally faded, despite an upbeat assessment on both employment and a forecast of increased growth in the economy by Alan Greenspan. The Fed Chairman's comments also led to a steep fall in the US dollar as he stated that a slide in the currency would not adversely affect the capital markets. The bid by Comcast for Walt Disney provided interest, as did a rise in oil prices following OPEC's announcement of a cut in oil production. A fall in consumer confidence, however, and a weak jobless figure on Friday disappointed and markets gave up some of the gains previously made. The real estate sector helped the Japanese market turn in positive returns this week despite the foreign investors selling for the first time in months. The mid week holiday combined with a cautious stance by investors resulted in a relatively quiet seven days. The concern over the continued yen appreciation meant the main indices lacked direction, whilst in Asia investors took profits from the recent strength over the last couple of months. European markets finished the week up, led higher by basic materials following the continued slide of the US dollar. Euroland GDP rose an annualised 1.2%, including a 0.9% and 2% rise in Germany and France respectively. France also saw a pick-up in waged employment figures in Q4. The Bank of England's 'Inflation Report' made for some bearish reading with regard to implications on interest rates.
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Ashburton bond and equity comment - 6 Feb 2004
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Tuesday, 10 February 2004
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General Market Analysis
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Positive manufacturing and construction data, and soothing comments regarding interest rates by a Federal Reserve official, helped the Dow and S&P higher on the week. However, a surprisingly cautious outlook from tech giant Cisco Systems led to a fall in the Nasdaq. The week closed with a weaker than expected employment report, which suggested that whilst the job market is growing, it is unlikely the economy is heating up sufficiently to lead to an imminent tightening in monetary policy. Defensive sectors were in vogue with Consumer Staple and Healthcare issues making good progress. The European market finished the week unchanged. Oil prices were volatile, ahead of the OPEC meeting and Gold remained below the USD400/oz barrier, consequently the energy and basic materials sectors led the laggards. German industrial orders rebounded strongly and French household confidence appeared buoyed. However, the strengthening euro does little to help the European outlook. Predictably, the BOE raised rates 25 basis points and the ECB left rates unchanged. Stocks in Tokyo fell over the week, with the previously strong consumer electronic and banking stocks particularly sold-off. Volumes have been lighter than average and volatility has increased. Concerns over the forthcoming G7 meeting, where traders are worried about a further strengthening of the yen, also weighed on the market.
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Ashburton bond and equity comment - 30 Jan 2004
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Tuesday, 3 February 2004
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General Market Analysis
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Despite many earnings reports beating forecasts, the S&P 500 recorded its first weekly loss of the year and its first loss in ten weeks. Profit taking accelerated mid-week following a change in the wording of the Federal Reserves' stance on the outlook for interest rates and a mildly disappointing Q4 GDP figure caused further discontent. Consumer cyclical, technology and telecom issues bore the brunt of the falls. Stocks in Japan edged lower following declines in the US and an appreciating yen. Economic data on the whole continues to be positive, with December unemployment falling faster then expected and Japanese exports remaining strong - particularly to Asia. Exports are continuing to re-orientate in importance from North America to China/Asia. Elsewhere, the spread of the Avian Flu Virus to ten countries is causing widespread concern. European markets followed the US markets into negative territory. In France business confidence was flat, undershooting estimates, whilst German business confidence continued its progress (with the Ifo Index moving from 96.8 in December to 97.4 in January, beating estimates). German plant and equipment orders in December also rose 29% from last year, driven higher by foreign orders (up 43% yoy), which is particularly encouraging considering the strength of the euro. This followed record domestic demand last month (up 46% yoy).
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Ashburton bond and equity comment - 23 Jan 2004
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Tuesday, 27 January 2004
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General Market Analysis
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Despite corporate earnings largely meeting or exceeding expectations, and following the lengthy rally we have seen, US markets found it difficult to make further headway. Moreover, there was little in the way of economic news to help investors drive shares higher, although housing figures were supportive. The US dollar reversed its decline briefly and the effect was enough to knock commodity prices - which led to profit taking in the basic materials sector. The S&P closed marginally higher on the week although the Dow and Nasdaq eased a little. Tokyo edged higher as expectations of improved earnings from Japanese corporates during the current earnings season overcame disappointing economic data. Heavy buying by foreign investors continued and was helped by a surprise easing of monetary policy by the BOJ. The BOJ is sending a strong message to the markets that it will not make mistakes of the past by tightening policy too early and thus stifling the economic recovery. Elsewhere within the region, most markets were closed due to Chinese New Year. European markets rallied on the back of excellent US company results. The euro resumed its climb against the dollar, in spite of conflicting announcements from ECB members. In the Euro-zone, industrial output was relatively flat in November whilst inflation fell to 2.0%. The UK saw its highest GDP growth rate in 4 years (3.6% q-o-q).
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Ashburton bond and equity comment - 16 Jan 2004
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Thursday, 22 January 2004
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General Market Analysis
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Further highs were seen by the US indices, with the Dow and S&P pushing to their highest levels since spring 2002. The week was dominated by corporate activity with the mega-merger announcement between JP Morgan and Bank One and the improving sales outlook from the industrial giant GE. Economic news was supportive with a buoyant consumer sentiment report and a smaller than expected trade deficit seen. This lent some much-needed support to the US dollar, which has rallied sharply. The appreciation of the yen dominated the Tokyo market last week. Investors focused on more volatile small and mid cap stocks less affected by the strong yen, hence, the blue chip stocks continue to perform badly. The Asian stocks also suffered on volatile trading ahead of the Chinese New Year, despite several mildly strong days in Hong Kong. European markets were led higher, supported by good corporate and macro figures. The recovery of the US dollar against both the euro and sterling also helped sentiment, while German industrial production continued its rise. Forecasts suggest that the UK will meet the lower end of the Chancellor's growth forecast for 2003-04 (3%). However, taxes will probably have to rise if he is to meet revenue targets and interest rates are likely to rise to 4.75% by December this year.
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Ashburton bond and equity comment - 9 Jan 2004
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Friday, 16 January 2004
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General Market Analysis
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The US indices built on the advances already seen this year with investors optimistic that the fourth quarter results will surpass all expectations. Telecom equipment and technology issues made the most progress on news of positive guidance from Nokia in Europe, whilst the US defence department awarded a huge network communications contract to manufacturers. Disappointing jobless figures dampened sentiment at the end of the week, although the overall tone remained relatively upbeat. European markets were pushed into positive territory by a surging technology sector (+11.35%), as some of the large cap tech stocks came out with positive news. The euro continued to strengthen against the dollar and continues to place pressure on European exporters. In Germany, unemployment declined moderately in December. The Bank of England and the ECB, as expected, left rates unchanged. The Asian markets got off to a bright start to the year. The technology sector was leading the Japanese market higher closely followed by energy. The Hong Kong market also steamed ahead after investors returned to trading following a quiet Christmas and New Year. The Chinese bullish story looks set to continue into 2004 to the benefit of both the Japanese and Asian markets.
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Ashburton bond and equity comment - 5 Dec 2003
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Wednesday, 10 December 2003
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General Market Analysis
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The Dow Jones and S & P indices rose on the week with continued optimism as prior economic data showed that the economy is growing at its fastest rate since 1984. Towards the end of the week some of the shine was lost, however, as Intel's revenue forecast disappointed investors, leading the Nasdaq lower. Basic materials firmed on further US Dollar weakness with gold pushing through some strong technical resistance levels, whilst the energy sector also made progress. European markets finished relatively flat on the week. PMI's continued their improvement, unemployment in Germany dipped lower and both the ECB and BOE left rates unchanged. One of the threats to better markets remains a euro that is too strong. The euro-dollar broke through the 1.21 levels amid high volatility. Japanese markets had a volatile week following the nationalisation of the regional Ashikaga Bank. Volume was once again light and economic data mixed. However, on the positive side commercial land prices in central Tokyo rose by 0.3% over the last six months, the first rise in 13 years. Elsewhere in the region, Australia's central bank raised interest rates for the second time in recent months in order to cool down the property and consumer credit markets. In Taiwan, the markets stabilised following a period of heightened political risk with China.
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Ashburton bond and equity comment - 28 Nov 2003
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Wednesday, 3 December 2003
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General Market Analysis
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A shortened week due to the Thanksgiving holiday saw a strong performance from Wall Street. The indices were bolstered by strong economic data as revised third quarter GDP figures showed a +8.2% growth rate and consumer confidence beat expectations. Cyclical issues made the running, with basic materials standing out as commodity prices strengthened further on the back of a weaker US dollar, followed by technology and Consumer groups. Pan European economic figures were supportive for the European equity markets. However, they were virtually unchanged due to the continuing weakness of the US dollar and the lack of volume owing to Thanksgiving in the US. In Japan, the Nikkei recovered past the 10,000 level for the first time in two weeks, whilst the broader Topix index had its first losing month in over eight months. Economic data painted a mixed picture, with Industrial Production for October coming in weaker than expected, combined with a rise in unemployment. However, October's Nationwide CPI came in at a positive 0.1%, adding credence to the unmistakable trend out of deflation. Elsewhere in the region, Hong Kong's third quarter GDP gained 6.4%.
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Switching Norwegian bonds into Sterling bonds
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Friday, 28 November 2003
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General Market Analysis
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A small weighting in Norwegian bonds was introduced to the Asset Management and Cash & Fixed Income Services on 18 July. At the time, the currency was oversold and the bond market offered good value relative to most other European bond markets. In the months that have followed, the Norwegian bond market has been the best performing in the developed world and one of the few to produce positive returns. Furthermore, the krona has performed well, registering gains against the both the dollar and euro (it is unchanged versus the pound). However, the case for continuing to hold Norwegian bonds is gradually fading away. Norway has dropped into the lower half of our bond valuation table. The currency has entered overbought territory. Ashburton have therefore decided to sell the funds Norwegian bond holding and to convert the proceeds into euro (thereby maintaining the funds overall exposure to European currencies for dollar and sterling-based services). Meanwhile, Ashburton have increased the funds exposure to the UK bond market, which continues to look good on both technical and valuation grounds.
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Ashburton bond and equity comment - 21 Nov 2003
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Tuesday, 25 November 2003
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General Market Analysis
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A combination of rising international terrorist activity, a weaker dollar and concerns over international trade, as the US imposed quotas on textile imports from China, led to a continuation of the weaker trend on Wall Street. However, economic data was supportive with the strongest housing start figures seen in 17 years and inflationary pressures also appearing relatively subdued. The atrocities that occurred in Istanbul weighed heavily on the European markets this week, which fell between 3-4%, with some of the higher beta sectors and tourist related stocks falling nearer 5%. This was despite improving GDP figures in the Eurozone, better than expected retail sales in the UK and good inflation numbers in both areas. In a quiet week for news-flow in Japan, investors maintained their recent strategy to take profits and drive the indices lower. Elsewhere in the region, banking stocks in Hong Kong gained after it was confirmed that the Chinese Authorities will allow Hong Kong banks to accept private investor Renimbi deposits for the first time.
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Ashburton bond and equity comment - 14 Nov 2003
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Wednesday, 19 November 2003
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General Market Analysis
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US equities fell this week, as economic data raised doubts regarding the sustainability of the economic recovery. Whilst ‘technology’ experienced a particularly bad week, ‘healthcare’ was a relative bright spot thanks to optimism on the Medicare bill and a general shift into defensive shares. The Japanese equity market reacted relatively badly to the poor showing by the LDP at the weekend election. Indeed, a generally cautious tone seems to be taking hold, despite upward earnings’ revisions from many companies. Asia and in particular the Chinese related stocks have suffered short-term from profit taking. European markets were generally weaker with the only sector providing positive support being healthcare. Third quarter Eurozone growth was better than expected. Although the German ZEW survey of business confidence registered another rise, French Industrial output is lacklustre and capital expenditure plans remain weak. In its inflation report, the Bank of England revised growth outlook upwards, stressing the risk that rising average wages and falling unemployment would intensify the upward pressure on inflation.
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Ashburton bond and equity comment - 7 Nov 2003
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Tuesday, 11 November 2003
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General Market Analysis
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Despite making marginal new highs for the year, Wall Street’s reaction to more good news on the economy (particularly on the employment front) was rather muted, thus indicating perhaps that the market is already priced for perfection. European markets had another good week, led higher by the chemicals, technology and cyclicals. The ECB left interest rates unchanged and the Bank of England increased rates by 0.25%. Although the Eurozone saw some encouraging PMI numbers, they were somewhat offset by a decline in German Industrial Production in September. Japanese equities churned sideways as investors adopted a wait-and-see approach ahead of the weekend’s general election. The Japanese corporate earnings’ season is now in full swing and the results thus far have generally been better than expected, despite the strong yen. Elsewhere in the region, Australia raised interest rates in an effort to curb the booming property market and consumer expenditure.
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Ashburton bond and equity comment - 24 Oct 2003
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Thursday, 6 November 2003
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General Market Analysis
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A rash of merger and acquisition activity boosted the US equity markets this week with takeovers announced in the financial, healthcare and consumer staple sectors. Further progress was limited despite reassuring comments from the Federal Reserve, improved employment data and blow out third Quarter Gross Domestic Product figures, reflecting an acceleration in growth to +7.2%, the highest in almost two decades. Markets had a good week, with the Eurotop300 moving up over 3%. Basic Materials led Europe higher following positive comments regarding Chinese demand for metals. The Russian market sold off following the arrest of Yukos' CEO (Khodorkovsky) after he reneged on a political 'power agreement'. The Kremlin is attempting to re-establish Russia's credibility with investors, insisting that this does not mean that they are revisiting past privatisations. Japanese Industrial Production, released on Wednesday, completely blew away all expectations. The economic assessment changed from "flat" to "showing signs of upward movement." The improvement is reinforced by the recent strong performance of domestic Japanese names.
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Ashburton bond and equity comment - 17 Oct 2003
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Wednesday, 22 October 2003
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General Market Analysis
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The US Indices all made new highs for the year. At the tail end of the week, however, caution and profit taking set in as one or two companies missed their earnings figures. This led investors to fear that the overall gains this year may be difficult to hold on to unless a continuation of bullish economic and earnings forecasts are seen. European markets pushed higher last week in local currency terms, led by basic materials, industrials and the more defensive staples. The Nikkei is heading to a year high, driven by Japanese domestic stocks. There is also healthy rotation into under performing sectors, in particular insurance and brokerage companies. The outlook for technology firms is improving but valuations are becoming increasingly expensive. In Asia, the H-shares and Red chip firms have started to outperform again after a quiet couple of months. The Australian market has been disappointing given strong commodity prices, however the best performing Asian countries have been Korea, Singapore and Taiwan on the back of firming technology orders.
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Ashburton bond and equity comment - 3 Oct 2003
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Tuesday, 7 October 2003
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General Market Analysis
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The first signs of a firmer employment market since January capped a good week for US equities. A broad-based rally drove equities higher, with consumer and technology issues to the fore. European markets recovered from their sell off, led higher by the technology sector and Euroland manufacturing also showed signs of recovery. On the negative side, France has leapfrogged Germany to the dubious title of having the worst domestic demand in Europe. Japanese markets moved higher, retracing virtually all the losses suffered due to the yen appreciation last week. Foreign investors turned net sellers for the first time in 24 weeks, although individual domestic private investors also turned net buyers and sales from Trust Banks eased considerably. Selling continued in the key-export dependent auto and electronic stocks, whilst domestic orientated sectors such as banking and real estate moved sharply higher. Elsewhere in the region, Hong Kong continued its move higher, pushed by banking and property stocks.
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Ashburton bond and equity comment - 19 Sep 2003
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Friday, 26 September 2003
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General Market Analysis
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US stocks enjoyed a broad based rally last week with indices reaching 52-week highs. Positive economic reports combined with the FOMC’s decision to leave interest rates at 45 year lows gave rise to hopes that economic and profit growth would accelerate. In a week in which France and Germany announced plans to stimulate European growth at a bilateral summit and Sweden gave the thumbs down to the euro, European stockmarkets continued to rise, with consumer staples, consumer cyclicals and banks leading the way higher. European economic data continued to be suggestive of economic recovery, with industrial production expanding by 0.6% in July and the latest German ZEW index of business confidence rising more than expected. The Asian markets were buoyant on the back of continued optimism but more consolidation is probably needed before further gains can be registered.
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Ashburton bond and equity comment - 5 Sep 2003
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Tuesday, 16 September 2003
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General Market Analysis
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Positive economic data continued to support US equities with the Nasdaq and smaller companies' indices making good progress, whilst the S&P and Dow Jones made more modest returns. Both Cisco and Intel made upbeat comments about current trading. European markets had a strong week and a broad rally, with the best three sectors being healthcare, technology and capital goods. Friday, however, saw a sell off, when US employment figures came in under expectations. Both France and the Eurozone saw some optimistic PMI figures, whilst Germany produced a very good July industrial production figure (2.4%), its biggest gain for three years. Japanese indices got off to a great start, with the Nikkei 225 posting its biggest gain of the year. The later trading focused on switches from banking and high-tech stocks, which surged early in the week, to pharmaceuticals, auto manufacturers, regional banks and other financial stocks. Elsewhere in the region, Hong Kong continued to pick up momentum led by the banking and property stocks.
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Ashburton bond and equity comment - 22 Aug 2003
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Thursday, 28 August 2003
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General Market Analysis
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The US markets made new highs on the back of more positive economic news, however profit taking retraced some of these gains. European markets had a very strong week, led higher by the tech heavy Scandinavian markets. Technology finished the week almost 10% higher and basic materials and consumer staples also proved strong. Europe continued to provide mixed signals, as France produced negative 2nd quarter Gross Domestic Product figures and Germany forecasted better than anticipated expectations for the industrial sector. The continued weakening of the euro will inevitably ease pressures on some of the exporters. This combined with reforms being implemented by Schröder (something that is currently lacking in France) helped Germany to produce good numbers. The continued strength in the Japanese market has started to broaden out as investors sought lagging sectors. The low-priced large cap stocks are rallying on improving earnings on back of industrial restructuring. In Asia, the Hong Kong and Thailand property markets were once again strong on the week. The Australian market was flat in the middle of various earnings reports.
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Ashburton bond and equity comment - 15 Aug 2003
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Thursday, 21 August 2003
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General Market Analysis
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Despite the worst power cut in US history, Wall Street managed to make useful gains on continued optimism that the economy was recovering. Further benign comments from the Federal Reserve also aided sentiment, as interest rates were held at record lows. European markets had a strong week with all the major bourses finishing in positive territory. All sectors finished higher, led by cyclical and technology stocks. German Gross Domestic Product fell for the second successive quarter whilst French indicators were mixed with a decline in employment contrasting with a rise in industrial production. The Japanese market rebounded strongly on the back of unseasonably high volume and better-than-expected Gross Domestic Product figures. There is now increasing confidence about the domestic economy and corporate earnings. Hong Kong property and the Taiwanese and Australian markets led the Asian indices higher.
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Ashburton bond and equity comment - 8 Aug 2003
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Wednesday, 13 August 2003
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General Market Analysis
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A mixed performance was seen on the week as US equities struggled to make progress, despite good news on the economic front with second quarter productivity above expectations and unemployment claims showing some improvement. On what was a very quiet seven days with regard to economic news, the European markets drifted down on low volume. The exception was the oil sector, which having under performed recently, rallied sharply on hopes of an economic recovery. The financial and technology sectors, which have been the market leaders, ran into the greatest profit taking. The Nikkei suffered its biggest weekly decline in almost four months led lower by the high Beta technology sector. Furthermore, with the start of the Japanese 'Obon' holiday season, volumes are expected to decline over the next week or so. Economic data in Japan, however, continues to be encouraging, with June's core machinery orders coming in much stronger than expected. Elsewhere in the region, Australia moved higher led by the basic material sector and the weakening Australian dollar.
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Ashburton bond and equity comment - 25 Jul 2003
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Tuesday, 29 July 2003
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General Market Analysis
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US equities made modest progress over the week edging forward as investors digested another week of earnings. Results have been encouraging with most beating expectations and formative signs of a manufacturing recovery have also been present. The European bourses ended the week slightly firmer but on relatively light volume. The main driver was the basic material sector as metal prices in particular gold, drove through some key resistance levels. Energy stocks under-performed as Royal Dutch/Shell announced they were cancelling their share buy back programme. On the macro side, both French consumer spending and UK retail sale figures were disappointing. Japanese equities closed the week higher after a slightly shaky start. Trading volume finally dipped below one billion shares for the first time in two months - a period easily exceeding the prior record set in the bubble years. Foreign buying, however, was once again spurred on by some better than expected corporate earnings.
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Ashburton bond and equity comment - 18 Jul 2003
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Tuesday, 24 June 2003
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General Market Analysis
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Although progress was much more modest following recent rises, US indices completed another week of gains. The background picture emerging has also been more sobering with the Federal Reserve beige book survey indicating that the US was expanding at a 'sub par' rate. Company news was also a little more negative with a number of technology groups guiding earnings expectations lower and an SEC investigation into the US's second largest mortgage provider. European equities were somewhat mixed this week. The financial sector continued to rally following last week's interest rate cut which pushed the FT Eurotop 300 higher. However, with the European Central Bank sharply lowering Gross Domestic Product growth forecasts, profit taking was predominant in most sectors. The Tokyo market turned in a solid performance on the week, following strong US markets. The banks and technology stocks continue to lead the market higher with an influx of foreign and speculative funds. In the Asian region, company earnings are largely ahead of forecasts and hence continue to out perform Japan.
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Ashburton bond and equity comment - 6 Jun 2003
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Tuesday, 10 June 2003
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General Market Analysis
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US equities enjoyed another week of gains, with sentiment bolstered by positive economic data and soothing words from Alan Greenspan regarding the outlook for the second half of the year. Although all sectors made good progress on solid volume, technology and utilities proved to be the laggards. Interest rate policy decisions in Europe were largely in line with consensus forecasts: unchanged in the UK and down 0.5% in the Eurozone. Economic data announced in Europe (French consumer confidence and German unemployment) was better than expected with the result that equity markets rallied, led predominately by the 'early cyclical' stocks and the technology sector. Continuing its strong performance of last week, the Japanese equity market posted solid gains with the TOPIX index advancing for eight straight days - its longest winning run streak for over nine years. Volume has been heavy, with foreign investors large net buyers. Elsewhere in the region, Hong Kong and Korea consolidated their recent gains whilst Singapore, Taiwan and the smaller Asian markets continued their recent strong rises.
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Ashburton bond and equity comment - 6 May 2003
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Thursday, 8 May 2003
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General Market Analysis
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US equities pushed higher this week as investors ignored further (Iraq-distorted) bad news on the economy focussed instead on better-than-expected corporate earnings reports. Technology shares rose strongly on the back of expectations that earnings will accelerate rapidly in the next two quarters. The Japanese equity market ended a volatile month with the laggard sectors (banks and real estate) finally enjoying some respite. Much of the recent volatility has been a result of politicians’ attempts to divert attention away from the ailing banking sector. Asian markets recovered as the news-flow on SARS finally started to improve. European Markets rallied (+1.8%) led higher by Germany and technology (+5.0%). European business confidence showed a decline with the Euro-zone PMI falling to its lowest level since Jan 2002. European manufacturing continues to be hit by poor global demand and the strong euro.
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Ashburton bond and equity comment - 25 Apr 2003
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Tuesday, 29 April 2003
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General Market Analysis
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US equities ended the week mixed with reasonably good results offsetting concerns regarding weak economic data and the SARS virus. Telecom shares performed particularly well as respectable earnings and hopes for consolidation in the sector saw share prices head higher. Whilst the S&P500 and the NASDAQ both gained 0.6%, the Dow Jones fell 0.4%. European markets weakened slightly, led lower by the Basic Materials and Energy sectors. French consumption rose slightly and the Banque Nationale de Belgique Confidence Index (a reliable leading indicator for economic growth) deteriorated unexpectedly. Disappointing results from Sony and other large blue chips added further selling pressure to the Japanese equity market. The Asian markets continued to struggle thanks to the SARS outbreak. The financial package unveiled in Hong Kong to combat the outbreak has raised concerns over its worsening fiscal position, and the market fell to a four-year low.
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Ashburton bond and equity comment - 25 Apr 2003
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Tuesday, 29 April 2003
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General Market Analysis
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US equities ended the week mixed with reasonably good results offsetting concerns regarding weak economic data and the SARS virus. Telecom shares performed particularly well as respectable earnings and hopes for consolidation in the sector saw share prices head higher. Whilst the S&P500 and the NASDAQ both gained 0.6%, the Dow Jones fell 0.4%. European markets weakened slightly, led lower by the Basic Materials and Energy sectors. French consumption rose slightly and the Banque Nationale de Belgique Confidence Index (a reliable leading indicator for economic growth) deteriorated unexpectedly. Disappointing results from Sony and other large blue chips added further selling pressure to the Japanese equity market. The Asian markets continued to struggle thanks to the SARS outbreak. The financial package unveiled in Hong Kong to combat the outbreak has raised concerns over its worsening fiscal position, and the market fell to a four-year low.
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Ashburton bond and equity comment - 21 Mar 2003
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Thursday, 27 March 2003
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General Market Analysis
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Global equity markets rallied strongly as diplomatic efforts to avoid war were withdrawn and the military campaign in Iraq began. Early signs that good progress was being made by coalition forces saw a strong relief rally on hopes that the conflict would be briefer than anticipated. The dollar appreciated against the euro, the Swiss franc and the yen while oil and gold prices fell with accelerated momentum. The lower oil price helped the Chemical and Airline sectors, both in the US and Europe, climb significantly higher. Sluggish economic statistics failed to stop the markets advance as investors rushed in to avoid missing the rally. On the week, the Dow, S & P and Nasdaq rose +8.43%, +7.52% and +6.08% respectively. Germany saw a further rise in the March ZEW (business confidence) number, offering further confirmation of a pick-up in activity. Although the ZEW was not a particularly strong figure it came in light of an unfavourable climate, reinforcing a relatively robust trend. The initial impression of the new Bank of Japan governor, Mr Fukui, has been encouraging because he has shown a willingness to consider more radical monetary policy measures.
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Ashburton bond and equity comment - 17 Mar 2003
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Wednesday, 19 March 2003
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General Market Analysis
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US Indices recorded their first gain in three weeks, although not before the Dow Jones and the S&P 500 saw new lows for the year. Steep falls were seen earlier in the week after concerns that leading mortgage providers may lack adequate capital to cover their commitments. However there was a sharp rebound as hopes were revived of a diplomatic solution to the Iraqi crisis. An ugly first three days of the week turned around and provided a bounce driven further by optimism that some sort of finale was being reached in the Iraq situation. The Tokyo stock market posted a new post-bubble low with the Nikkei falling below 8000 for the first time in 20 years. Fears over the exposure of Japanese banks to the falling equity markets led to renewed selling of banking shares, whilst for the first time in ten weeks large-cap stocks outperformed small/mid-cap stocks. Elsewhere in the region, Australia, Hong Kong, Singapore and some of the other smaller markets finished the week on a positive note whilst South Korea continues to suffer geo-political concerns.
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Ashburton bond and equity comment - 3 Mar 2003
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Thursday, 6 March 2003
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General Market Analysis
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Over the week, US equity indices drifted lower on light trading volumes ensuring that the Dow Jones and S&P both ended down for the third consecutive month. Economic news has reflected a dip in US consumer confidence to nine year lows, although 4th quarter Gross Domestic Product and manufacturing reports have indicated some growth is being seen. European bourses fell sharply despite reasonable economic news from both France and Germany, which suggested that growth was stagnating rather than declining. This was due to the continuing geopolitical problems and an accounting scandal that rocked the Netherlands. Enronitis reached Europe in the shape of Ahold's announcement that they had overstated earnings for the last few years. Japanese indices once again flirted with 20-year lows, as supply-demand issues and geopolitical risks weighed heavily on the market. There was also some disappointment at the announcement of the next Bank of Japan Governor, Toshihiko Fukui, although this had been largely factored into the market. On the positive side, earnings continue to surprise on the upside and January's industrial production rose for the first time in five months.
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Ashburton bond and equity comment - 14 Feb 2003
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Thursday, 27 February 2003
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General Market Analysis
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US Indices rose for the first time in five weeks, despite the continuing uncertainty over the Middle East. The Chief UN Inspector, calling for increased inspections rather than military action, did little to resolve any of the geopolitical issues, although it has given the markets some relief and hedge funds have also used the opportunity to close bear positions and lock in profits. German industrial production fell in the fourth quarter, posting the sharpest decline since February 1999. French December industrial figures were also well below market expectations, registering their sharpest monthly decline in five years. There was a mixed reaction to this news, with positive moves from Banks, Telecommunications and Utilities and negative reaction from Basic Materials and Consumer Cyclicals. Better-than-expected fourth quarter Gross Domestic Product figures capped a positive week in Japan. The better macro figures were augmented by generally positive corporate earnings, which provided good support to equity markets. Elsewhere in the region, Australia was particularly hard hit as investors priced in a slowing economy and appreciating currency. Other markets were generally flat on the week.
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Ashburton bond and equity comment - 7 Feb 2003
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Wednesday, 12 February 2003
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General Market Analysis
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Overshadowed by the Iraq 'crisis', Wall Street recorded a fourth straight week of declines. An unexpected drop in unemployment failed to reverse the negative trend for share prices, as poor earnings visibility continued to weigh on sentiment. Japanese share prices drifted higher, as good profits news and continued foreign buying marginally outweighed sales by pension funds and banks unwinding cross-shareholdings. However, events in Iraq and more importantly North Korea served to limit the extent of the rise. In Europe, Germany led a broad based stockmarket decline, falling 6.5%. The economic picture in Germany continues to look desperate, as evidenced by the recent collapse in industry orders. Rising unemployment saw French consumer confidence drop to its lowest level since February 1998. The ECB saw fit to leave its benchmark interest rate unchanged, despite the fact that the region's strongest economy (the UK) saw its equivalent rate drop by 0.25%.
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Ashburton bond and equity comment - 31 Jan 2003
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Wednesday, 5 February 2003
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General Market Analysis
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US indices recorded another week of losses, as lack of earnings visibility and the threat of war overwhelmed positive economic data and words of optimism from the Federal Reserve. Exceptions included the Energy sector, which benefited from the high oil price and the telecom sector, which gained on the back of surprisingly strong figures from Verizon. European markets finished flat on the week, however the sector moves had a distinctly defensive feel to them as talk of an Iraqi war continued to dominate market sentiment. Energy, Healthcare and Utilities finished the week in positive territory whilst Financials, Capital Goods and Telecommunications led the fallers. Despite being lower than expected, the German IFO number still affirmed a positive trend in German business confidence (87.4 in January v 87.1 in December). Japanese equities also suffered from war jitters, with the broader Topix index closing down 4.7% on the week. Economic news (industrial production and employment) was generally negative. Bargain hunting was seen in oversold export stocks as the Yen weakened significantly against the US$. Asian markets were generally more resilient ahead of Chinese New Year.
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Ashburton bond and equity comment - 24 Jan 2003
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Wednesday, 29 January 2003
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General Market Analysis
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The US markets' decline accelerated amid worries that America would dispense with a UN mandate and wage war on Iraq, probably in coalition with the UK. The Dow Jones and the S&P 500 have now given up their gains for the year. The European bourses continued to fall sharply, with the FTSE breaking a new record by falling for ten successive trading days and European indices made it eight successive falls. The markets were unnerved by splits emerging between Britain, America and the majority of the U.N over policy on Iraq. In addition, as the falls increased and many key support levels were broken, rumours that insurance companies would be 'forced sellers' began to emanate. Although the major Japanese indices barely registered a change on the week, turnover increased markedly, as both foreign and public fund buying was balanced by domestic institutions using the increased liquidity and last week's gains to sell cross held shares. Strong gains were, however, seen in the small to mid-cap sectors. Bonds continue to trade contra to equities and seem likely to remain strong until some decisive movement on the Iraq situation.
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Ashburton bond and equity comment - 17 Jan 2003
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Wednesday, 22 January 2003
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General Market Analysis
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US markets could not sustain their momentum as the fourth quarter earnings' season got fully under way. Whilst results were either slightly better or in-line with expectations, cautious comments from leading technology groups citing soft business conditions and cuts in capital expenditure led to profit-taking. The European bourses fell sharply this week, giving back most of the gains achieved during the month. The news flow from all directions was poor. Economic data on both sides of the Atlantic was disappointing and a number of high profile companies were cautioned over future growth prospects. News that recapitalisation by individual Japanese banks was progressing and optimism for further deals spurred foreign led buying in large volumes. The yen continued to strengthen against the US dollar to around 117.50, a level not seen for four months, causing exporters to be sold off. Elsewhere in Asia, most markets saw healthy profit-taking towards the end of the week after a strong start. Government bonds ended the week stronger, fuelled by poor consumer confidence data and nervous equity markets.
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Ashburton bond and equity comment - 10 Jan 2003
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Wednesday, 15 January 2003
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General Market Analysis
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US stocks made further progress as President Bush's proposed US$670bn economic stimulus package aided sentiment. Strong earnings forecasts from data storage groups, positive brokerage comments and rumours of asset re-allocation, switching from bonds to equities, also fuelled the momentum. European markets finished the week slightly down, led lower by the consumer cyclicals sector. Figures released on Thursday indicated that the growth in the Eurozone economy for the last quarter of 2002 and the first quarter this year would be lower than previously expected. However, growth in 2003 is still expected at 1.8% to be a full percentage point higher than last year. A poor start to 2003, as increased cross shareholder unwinding took the Japanese markets lower. Rumours that consumption tax would be raised together with weak December sales pulled down retail stocks. Korea was the biggest loser in Asia, as investors scaled back their overweight position in favour of the laggard Southeast Asian markets. Heavy buying from Chinese retail investors saw significant gains in 'H' shares and Red-chips. Friday saw very week non-farm payroll numbers out of the States, yet the bond market failed to make much headway. Could this be signalling a trend change?
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Ashburton bond and equity comment - 3 Jan 2003
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Wednesday, 8 January 2003
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General Market Analysis
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The New Year started with stronger factory and production figures, helping investors to temporarily forget international issues and driving markets higher albeit in light trading. European markets rebounded, led higher by technology and telecommunication stocks. In the lead up to Christmas, retail figures in the UK have been disappointing but there are early indications that the post Christmas sales period were good. UK house prices have had a very strong year, buoyed by the lowest financing costs in over a generation, they finished the year up 25.3%. A quiet week in Japan as the markets were closed for holidays. Elsewhere in Asia, markets finished on a high note following the strong manufacturing numbers in the US, particularly the more US export sensitive markets of Hong Kong, Korea and Taiwan. A good week for equities saw government bonds sold off across all major markets, leading the benchmark 10-year yield in the States to move back above 4%.
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Ashburton International Values closes
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Monday, 6 January 2003
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Official Announcement
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Share in the Values Fund are no longer offered for subscription. Following an EGM on 19 Dec 02, the Shareholders resolved to close the Values Fund and, as a result, investment into this fund in no longer possible.
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Ashburton bond and equity comment - 27 Dec 2002
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Monday, 6 January 2003
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General Market Analysis
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US equities fell over the period as international issues came to the fore and kept any sign of a rally into the New Year at bay. The uncertain geo-political backdrop has resulted in a rise in commodity and oil prices and has also raised fears that consumer spending may ease and corporate profits will be slower to recover. A week of negligible volume in Europe saw markets weaken, led by the technology and telecommunications sectors. Improving morale in French businesses bucked the gloomier trend set by poor business confidence in Belgium (a leading sentiment indicator for European business confidence). Japanese equities closed the week higher on rumours that public pension money was being injected into the markets. November industrial production was lower than expected representing the third straight monthly decline. Volumes were particularly thin as foreign investors were absent for the Christmas break. Growing tensions over North Korea sent South Korea and most other Asian markets lower and provided the catalyst for another strong week for government bonds.
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Ashburton bond and equity comment - 20 Dec 2002
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Monday, 6 January 2003
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General Market Analysis
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A mixed week was seen by the US indices, as a number of negative earnings statements were received and the US appeared unhappy with the Iraqi weapons' declaration report. This was offset by positive comments from Alan Greenspan, suggesting that the US economy was emerging from a "soft patch", and an agreement reached by securities firms to settle claims that their research misled investors. An initial rally in Europe was reversed after the IFO cut German 2002 GDP forecasts and stated that German unemployment would hit 4.22m in 2003. Japanese equities finished the week on a high note, after again toying with 19 year lows, following continued public feuding between the Bank of Japan and the Ministry of Finance. Elsewhere in Asia, Roh Hoi-chang's victory in the presidential election in South Korea has led to concerns about deteriorating relations with the US, as Roh is a supporter of closer relations with the North. Government bonds strengthened across major markets as the likelihood of war in Iraq strengthened.
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Ashburton bond and equity comment - 13 Dec 2002
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Wednesday, 18 December 2002
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General Market Analysis
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Wall Street registered its second week of losses as the October/November rebound ran out of steam. Economic indicators were mixed with higher jobless claims being offset by better than anticipated confidence numbers. Investors were uncertain as to the broader implications of a shake-up in President Bush's economic team. Negative sentiment was fostered by the situation in the Middle East, uncertainty over North Korea's nuclear aspirations and widespread strikes in Venezuela. The bourses of Europe also experienced more profit taking, with most of the economic data failing to meet expectations. The week ended with the ECB downgrading its growth estimates to 1.0% for 2002 and to 1.1% for 2003 (from 2.1%). Japanese equities also finished the week lower. The BOJ's Tankan survey appeared upbeat but the outlook for the next quarter was quite pessimistic. Exporter stocks were sold off as the yen strengthened and December futures/options expiry prompted across the board program selling.
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Ashburton bond and equity comment - 6 Dec 2002
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Wednesday, 11 December 2002
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General Market Analysis
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The recent rally in US equities finally came to an end. There were several disappointing earnings announcements or guidance from companies plus the possibility of United Airlines declaring bankruptcy. Not surprisingly, the Technology and Telecommunication stocks were the main losers after showing the biggest gains in recent weeks. Weaker economic figures also coincided with the resignation of the Treasury Secretary and White House Economic Advisor. Profits were taken in Europe, following several weeks of gains. Extremely weak Purchasing Managers Index service data in Germany coupled with poor data in the US, led to the fall. As expected, the European Central Bank finally cut interest rates by half a percent but as this had already been priced into the market, it did little to counter the decline. After a strong start to the week, Japanese equities succumbed to a bout of cross share unwinding, pushing the Nikkei once again below the 9,000 level. Declining overseas markets further dented sentiment and foreign investors once more turned net sellers. Government bonds rallied on the back of falling equity markets and poor corporate data from the States.
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Ashburton bond and equity comment - 29 Nov 2002
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Wednesday, 4 December 2002
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General Market Analysis
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The US markets continued to move higher on lighter trading volumes as investors headed into the thanksgiving holiday season. Once again, the technology and telecom stocks outperformed at the expense of the defensive sectors. The recent positive economic figures are also pointing to improving economic conditions and consumer sentiment. The Dow Jones, S&P500 and the NASDAQ all rose over the week. European bourses maintained their recent gains in the belief that the European Central Bank would cut interest rates by a quarter or a full half percentage point. Business confidence figures in France and Germany also added to the optimism, as did the relatively calm return of the United Nation's inspectors to Iraq. Japanese equity markets finished the week at a two-month high with broad-based buying. Domestic and exporter stocks gained as foreigners returned to an attractively valued market. Elsewhere in Asia, recovering domestic consumption led to better-than-expected 3rd Quarter Gross Domestic Product figures in Hong Kong. It was a quiet week for bonds. Much of the recent gain was maintained but there was no appetite for a further rally.
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Ashburton bond and equity comment - 15 Nov 2002
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Wednesday, 20 November 2002
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General Market Analysis
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US market confidence improved throughout the week, following Iraq's agreement to comply with UN arms inspections. This was followed by HSBC Holdings' acquisition of leading US consumer finance company Household International and surprisingly buoyant retail sales figures. Positive consumer confidence figures also aided sentiment. The telecom and technology sectors lead the European rally, despite the European Commission revising down economic forecasts. A sharp fall in the German ZEW (indicator providing measures of future economic growth), together with a fall in French industrial production, could pave the way for the European Central Bank to cut interest rates in December. Although third quarter Gross Domestic Product came in better than expected, Japanese equities finished another tumultuous week with new 19 year lows. Concerns over the banking system once again resurfaced, with United Finance of Japan seen as particularly vulnerable to nationalisation. Elsewhere in the region, Hong Kong gained over the week, following mildly positive measures to help the housing market and Moodys upgraded Korea's rating to positive. US Bonds ended the week down, in the face of stronger equity markets, whilst other government markets were broadly neutral.
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Ashburton bond and equity comment - 1 Nov 2002
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Wednesday, 6 November 2002
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General Market Analysis
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Wall Street experienced its fourth consecutive week of gains, as a stream of bad news on the economy gave rise to hopes for a further cut in US interest rates at this week's FOMC meeting. European markets finished the week relatively flat, with strength coming from the 'high beta' sectors, such as technology (+5.3%) and consumer cyclicals (+2.2%), which prospered on the back of interest rate cut optimism. The Eurozone manufacturing PMI number came in below the 50 mark for the second month in a row. Japanese equities traded slightly lower this week, reflecting the market's disappointment over the bank reform plan, which was a watered-down version of the initial aggressive proposals made by the FSA. The government announced its anti-deflation package, aimed at softening the impact of the plan but this also appears too vague and weak. Investors remained sidelined as they now contemplate the prospects for economic and political progress. Profit taking was seen generally across Asia as investors moved to lock-in recent gains. Bonds enjoyed a week of gains, as speculation of another round of interest rate reductions intensified.
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Ashburton bond and equity comment - 25 Oct 2002
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Wednesday, 30 October 2002
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General Market Analysis
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A third straight week of gains was registered in the US markets, despite some economic data still giving cause for concern. The markets most troubled stocks, such as telecommunication and internet companies, have seen an impressive rebound from their lows, whilst more defensive sectors such as healthcare and energy were weaker. A similar story in Europe where technology and telecom stocks continued their recoveries and the chemical and energy sectors fell due to the easing of tension over Iraq. The Bank of England and Sweden have both now moved to an easing bias after the Monetary Policy Committee voiced concerns over international threats and the risk of a further equity slump. Political disagreement over the FSA's proposals for financial reform led the Japanese government to delay an announcement, sending equities lower. Investors were left confused as to the exact details due to be released this week, together with the government's anti-deflationary package. Asian markets were generally firmer, in particular the smaller markets of South East Asia which were playing catch-up and Hong Kong which broke up through key technical resistance levels. Bonds were largely flat on the week in the absence of major direction from equity markets.
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Ashburton bond and equity comment - 18 Oct 2002
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Wednesday, 23 October 2002
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General Market Analysis
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US markets recorded their biggest gains in more than a year, as investors reacted positively to the flurry of results from the commencement of the third quarter earnings season, with 60% of companies beating expectations. The coming week sees a continuation of the earnings reporting season and this no doubt will set the ongoing tone for the markets. The European markets continued their strong rally, with Scandinavia, France and Holland all up over 8% and technology increasing 18%. Fuelled by the gains on Wall Street Japanese markets rebounded with the Nikkei recovering the important 9,000 level, its strongest performance since March. Concerns that the stance on the bad debt problem had been too aggressive eased somewhat with the markets now trading at the levels seen immediately after the formation of the Takenaka project team. Elsewhere in the region, the larger Asian markets rebounded strongly whilst the smaller predominantly South Asian markets underperformed due to the after effects of the Bali bombing. Government bonds in Europe and the US continue to trade contra to their respective stockmarkets, which ensured a major spike in yields, as bonds were sold off in favour of equities.
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Ashburton bond and equity comment - 11 Oct 2002
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Wednesday, 16 October 2002
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General Market Analysis
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US stocks finally managed to close the week higher as markets rebounded sharply from five-year lows buoyed by positive news from General Electric. Investors attention will this week focus on the third quarter earnings season, for further signs of recovery in corporate America. European markets put in a solid performance, with a series of good numbers emanating from Germany, where data on manufacturing orders, industrial production and unemployment all gave signs of encouragement. Japanese equity markets fell further over the week on concerns of the likely deflationary impact of an aggressive disposal of banks non-performing loans. The Nikkei fell over 5.2%, its worst weekly performance in three months, as international selling persisted for the sixth week in succession. Towards the end of the week the Bank of Japan announced the details of its long awaited stock-buying programme, but a lack of any significant new initiatives left the markets distinctly unimpressed. The Bank of Japan has once again firmly placed the ball back in the government's court to tackle the 'non-performing loan' problem and rampant deflation. After hitting a high point on Wednesday, US and European bonds ended the week lower as equities put in a strong rally on Thursday and Friday.
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Ashburton bond and equity comment - 4 Oct 2002
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Wednesday, 9 October 2002
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General Market Analysis
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The US markets closed firmly in the red for a sixth consecutive week due to the now familiar concerns over slowing profits growth, bad debt levels, and the impending war with Iraq. One ray of light was a strong performance from the telecommunications sector, following a positive industry report from Goldman Sachs. European Markets dropped once again, driven by poor economic news from Germany. The inflationary effect of the Euro denominated Brent crude oil price (up 5.7% in September) has persuaded the European Central Bank not to reduce interest rates, thus prolonging the economic stagnation. The main focus in Japan was the appointment of Takenaka as Financial Services Minister and Kimura to join him on the newly formed Financial Reform Panel. Both men advocate taking aggressive steps to dispose of bad loans within the financial system. Although these measures are necessary for the long term health of the economy, the lack of any detailed plan has left investors fearing that banks will be forced to make weak lenders fail and cause further deflationary pressure. Investors continued to sell bank shares and debt-laden companies, pushing the Nikkei back below the 9,000 level. The record low levels of benchmark yields seemed to dissuade investors from further bond investment, despite continued falls on global stockmarkets.
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Ashburton bond and equity comment - 27 Sep 2002
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Wednesday, 2 October 2002
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General Market Analysis
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The US indices concluded a volatile week in negative territory following disappointing consumer confidence figures and weaker than expected GDP numbers. The Dow Jones, S&P 500 and NASDAQ fell 3.6%, 2.1% and 1.8% respectively, the fifth straight week of declines. The one sector to show any gains was energy, buoyed by a firmer oil price. European bourses finished the week slightly better, led by defensive sectors such as healthcare and basic materials. Decent Ifo numbers failed to rescue the beleaguered German market with Dax finishing 5% down on the week. Japanese equity markets closed slightly firmer, on expectation of accelerated disposal of non-performing loans by the Resolution and Collection Corp. It is also hoped that a Cabinet reshuffle next week will see the departure of FSA chief Yanagisawa, to be replaced by a more reformist individual willing to push through measures to address the ailing banking system. The sell off continued across Asia as global markets moved lower. Bonds in Europe and Japan ended the week little changed but the equity sell-off on Friday in the US ensured that yields dropped to 3.66%.
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Ashburton bond and equity comment - 20 Sep 2002
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Thursday, 26 September 2002
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General Market Analysis
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The US markets dropped once again, with all the major indices registering steep falls, following poor economic statistics on industrial production and employment. The ongoing uncertainties over a possible war in Iraq merely added to the bearish tone. European bourses suffered a poor week, with the French, German and Dutch exchanges all falling over 8%. Momentum is clearly negative, and in the absence of global growth, restructuring will be the dominant theme going forward. The UK, despite ending the week down 3.7%, had a relatively strong performance, with consumer spending holding up well.
Japanese equity markets ended the week higher after the Bank of Japan stunned markets with the unprecedented announcement it would be buying equities from Japan's troubled banks to shore up the financial system. Although details still remain vague, the move is a positive and unexpectedly bold response by the Bank of Japan and helped markets overcome the meltdown seen in the US and Europe. Elsewhere in the region, markets generally fell in tandem with the global sell-off, with much better than expected 2nd Quarter GDP figures in Thailand being brushed aside. Government bonds in both Europe and America remained strong in the face of plunging equity markets. The one very notable exception was Japan, were the Government Bond auction finished undersubscribed for the first time ever, indicating that the bond market is concerned over the Bank of Japan's move to buy equities.
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Ashburton bond and equity comment - 13 Sep 2002
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Wednesday, 18 September 2002
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General Market Analysis
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The anniversary of September 11th saw indices move lower in light trade as the economic news continued to be mixed. Strong August retail sales figures for autos and home furnishings were offset by a weak consumer confidence reading from the University of Michigan, the lowest seen in ten months. President Bush's speech to the UN, whilst positively received, has also heightened the possibility of war with Iraq. European equity markets continued to fall, as threats of international conflict persist. Weak corporate news on the domestic front further damaged sentiment with Dutch giant Philips issuing a profit warning. The only strong sectors were the defensive basic materials and consumer staples. In a quiet week with continuing low volume, Japanese markets drifted marginally higher. The dividend yield is now unusually higher than the yield on JGB's, which should provide some support for the markets. US 10-year yields once again breached the 4% level, as concerns over war in Iraq continue to dominate world events.
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Ashburton bond and equity comment - 6 Sep 2002
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Wednesday, 11 September 2002
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General Market Analysis
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Wall Street finished a volatile week in negative territory, with the Dow Jones, S & P 500 and NASDAQ down 2.73%, 2.42% and 1.49% respectively. American economic news was mixed, with a disappointing manufacturing survey balanced by an unexpected drop in the unemployment rate from 5.9% to 5.7%. Trading volumes were light ahead of the 11th September anniversary. European bourses fell sharply on the week on political concerns, the possibility of a Middle-East conflict and poor economic data. August industrial production data was weaker than expected in both Germany and France. Overall EU second quarter GDP growth was only 0.3%, roughly half the expectations of twelve months ago. The ECB announced that they thought interest rates were at an appropriate level, thereby dampening expectations for a rate cut. Most sectors were down on the week, with only the extremely defensive consumer staples posting a positive return. The Japanese market fell to the lower end of its recent trading range led by exporters, on growing evidence of a global economic slowdown and concerns regarding the low level of capital adequacy ratios in the banking sector. Although the Nikkei hit a 19-year low, the 9000 support level was held on a closing basis.
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Ashburton bond and equity comment - 30 Aug 2002
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Wednesday, 4 September 2002
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General Market Analysis
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After rising for five straight weeks, the US markets suffered a setback in light trading ahead of the Labor Day bank holiday weekend. Economic statistics were generally in line with expectations, although an increase in unemployment and Intel citing continued weakness in the technology arena have raised concerns about the strength of consumer spending. Most European bourses and sectors wiped out the gains of the previous week in response to poor economic data. The main concerns are a weaker than expected German Ifo survey and inflation in August rising above the European Central Bank target level of 2%. The Nikkei fell for four straight sessions after breaking above the key 10,000 level at the beginning of the week, with light volume and a lack of incentives pulling the market lower. Stronger than expected 2nd quarter GDP data, up 0.5%, failed to excite the market as 1st quarter GDP figures were revised downwards and weak July industrial production rekindled export concerns. Fear of cross-share unwinding into the fiscal year-end remains the biggest drag on the markets. Bonds were once again supported by evidence that equity markets were unable to mount a sustained rally. Government bonds in the US, Europe and Japan all ended the week stronger, as nervous investors continue to seek sanctuary from equities.
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Ashburton bond and equity comment - 23 Aug 2002
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Monday, 2 September 2002
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General Market Analysis
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The US indices rose for a fifth consecutive week from the low point in July. Trading volumes however were very light, reflective of the slow holiday season and ongoing concerns over corporate governance. As with America, the European markets rallied again this week with most sectors posting gains. The exception was the healthcare sector, which had to contend with poor corporate figures and various disappointments over drug trials. No major economic figures were announced in Europe, however, several key indicators are due shortly and concerns that these will paint further economic gloom tempered any gains. Japanese markets drifted higher in light volume as non-resident investors turned net buyers for the first time in nine weeks. Short covering and buying by domestic institutions outweighed fears of cross-share unwinding into the fiscal year-end on 30th September. Japan's trade numbers indicated that the upward momentum in exports has continued into July, despite the strong yen. Bonds had a mixed week, gaining slightly in the US where conflict with Iraq is still a factor, while European bonds dropped marginally on stronger equity markets.
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Ashburton bond and equity comment - 16 Aug 2002
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Wednesday, 21 August 2002
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General Market Analysis
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The US markets' recovery from the July lows continued despite the Federal Reserve disappointing some investors when they failed to lower interest rates. Large capitalised technology stocks led the indices higher and this was reflected in the NASDAQ's relative outperformance on the week, with the authorisation of accounts by CEOs in the end not creating any drama. European markets finished the week relatively flat. Germany was led lower by poor sentiment figures, affected by deteriorating equity markets, fear of a drop-off in US consumer demand and the possibility of tighter monetary conditions. Japanese markets experienced a volatile week amidst very light volumes due to the Obon holiday period. A lack of domestic players and little on the news front left the market at the mercy of overseas sentiment. Elsewhere in Asia, the Australian reporting season started in full swing with a raft of better-than-expected results. Government bond markets saw big moves during the week, with the US 10-year benchmark yield hitting 3.95% on intra-day trading before recovering sharply by the end of the week. The jury is now out with regard to further rate cuts by the Federal Reserve, however, the move to an easing bias is likely to provide support to bonds short-term.
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Ashburton bond and equity comment - 9 Aug 2002
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Wednesday, 14 August 2002
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General Market Analysis
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The US markets finally rallied, with the Dow Jones, S&P 500 and NASDAQ all recording their largest percentage gains since last September. Worries over the large number of companies still left to sign off on their accounts before the August 14th deadline were put to one side, as investors were cheered by the US$30 billion IMF loan to Brazil and increasing talk of the Federal Reserve reducing interest rates. European markets managed to make good advances, despite poor German unemployment figures and lacklustre industry orders. The market instead took heart from improving industrial production numbers, which helped the Index to finish the week up 6.46%. Japanese markets started the week in a bearish mood, falling to within a few points of the 18-year low established back in February this year. However, bouncing Western markets and positive economic data spurred a sharp rally into the end of the week, with unexpectedly strong machinery orders indicating a continuing recovery in domestic demand. July also saw big net purchases by both individual and corporate investors. For the first time in quite a while, both government bonds and equities were higher in the same week. Bonds have been supported by the growing realisation that interest rates will almost certainly not rise in the States this year and there is still a chance of further rate cuts.
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Ashburton bond and equity comment - 2 Aug 2002
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Tuesday, 6 August 2002
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General Market Analysis
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US markets failed to build on the sharp rebound experienced at the start of the week, as evidence of a subdued recovery became clearer in the form of lower than expected GDP figures and a manufacturing survey which was surprisingly weak. These indicators led investors to believe that there is likely to be further weakness in the economy and the long awaited rebound in corporate earnings seems a more distant prospect. European markets had a very strong start to the week but consolidated towards the second half, with the Eurotop300 finishing up just over 1%. Economic figures were generally poor, with a decline in the Purchasing Managers Index and both French household confidence and German retail sales saw sharp declines. The Bank of England and the European Central Bank both left rates unchanged, however, pressure is now mounting on both central banks to ease monetary policy. Japanese markets closed marginally higher, supported by domestic private investment, whilst international selling persisted for the sixth consecutive week. On the whole, economic news continues to be positive, whilst corporate earnings have been generally upbeat. Government bonds continue to strengthen, as the market moves towards the belief that a strong bounce in equity markets may not unfold in the short term.
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Ashburton bond and equity comment - 26 July 2002
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Wednesday, 31 July 2002
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General Market Analysis
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A week of extreme volatility saw the S & P 500 and the tech-laden NASDAQ reach new 5 year lows, before staging a much-needed rebound. Congressional allegations of collusion by investment banks in the Enron debacle panicked investors early on, although vehement denials by the financial institutions shored up sentiment later in the week. Once again, the telecoms and technology sectors recorded the biggest declines. The European bourses had a roller-coaster week, which combined with extreme sector rotation. The healthcare sector rallied following recent weakness, whilst the consumer staple and telecom sectors showed resistance. However, this was more than offset by double digit falls in technology and mining shares. On the economic front, the German IFO was weaker than expected but reasonable inflation news improved sentiment. Asian and Japanese equities experienced heavy selling as foreign mutual funds made asset allocation shifts away from the region. The yen reversed its recent strength against the US dollar, invoking interest into Japanese export stocks. It was another strong week for government bonds, with gains posted in all major western markets. Japan once again bucked the trend, ending lower, after a badly received 10-year auction and a growing belief that deflationary pressures are beginning to ease.
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Ashburton bond and equity comment for 12 July 2002
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Thursday, 18 July 2002
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General Market Analysis
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US markets recorded their steepest weekly decline since the aftermath of 11th September. Worries over corporate governance continued, with Merck and Duke Energy adding to the concern over accounting practice. The combination of these fears has further weakened the US dollar, specifically against the yen, and raises concerns that international investors are beginning to repatriate US assets. The European bourses also fell sharply, with the FTSE Eurotop 300 index declining over 8%. The period was marked by poor macroeconomic figures in both Germany and France and continuing concerns within the corporate sector about accounting problems and solvency issues. Amidst falling global markets, and a strengthening yen, Japanese equities finished the week marginally lower. Yen sensitive exporters were sold down whilst domestic related issues fared a little better. Elsewhere in Asia, markets were generally lower but continued the outperformance against their Western counterparts. Bonds continue to be negatively correlated to equities, resulting in further strong gains on both sides of the Atlantic.
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Ashburton bond and equity comment for 08 July 2002
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Wednesday, 17 July 2002
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General Market Analysis
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A holiday-shortened week in the US saw the Dow Jones Industrials rise 1.5%, the NASDAQ decline 1% and the S&P 500 barely changed. However, these movements disguise a great deal of volatility, with Friday's sharp recovery wiping out significant losses registered earlier in the week. Europe also had a poor first half to the week, given concerns regarding the solvency of insurance companies and corporate accounting standards. However, the markets recovered towards the end of the week to finish down 0.5%. There was good news on the economic data front; the CPI fell to 1.7% in June (from 2.1% in May), thereby easing the pressure on the ECB to raise rates. Japanese equities posted gains on the week as a better than expected Tankan survey boosted confidence that the cyclical recovery is gaining momentum. In addition, the government also released various economic indicators that were surprisingly strong. Untainted by accounting scandals, other Asian markets were also generally firmer. Like equities, bonds were little changed on the week. However, here again, the end result belies a great deal of volatility, with bonds beholden to the fluctuating fortunes of the equity markets.
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Ashburton bond and equity comment for 28 June 2002
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Wednesday, 17 July 2002
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General Market Analysis
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This week saw more turbulence in the US markets, although they held up surprisingly well with the S & P 500 and NASDAQ ending the week in positive territory and the Dow Jones barely moving. This was despite major accounting irregularities from both WorldCom and then Xerox. The roller coaster ride in European markets continued with bourses finally finishing on average 2 % up on the week. The positive returns in Europe were due to a combination of reasonable economic data, showing moderate economic growth and lower inflation helped by the appreciation of the euro against the US dollar. Equity markets in Japan experienced a volatile week with volumes remaining low. The WorldCom news caused a wave of selling, however, this was tempered with buying ahead of the quarter end, predominantly from domestic pension funds, leaving the indices in positive territory on the week. Combined intervention from the European Central Bank and the Bank of Japan on Friday only temporarily halted the strength of the yen against the US dollar, as it broke through the 120 level. Elsewhere, Asian markets were resilient to the fallout in global markets with the exception of the technology dominated Korean market. Bonds once again took their lead from the volatile equity markets, appreciating sharply early in the week as the WorldCom news hit but selling off as equity markets recovered.
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Ashburton bond and equity comment for 21 June 2002
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Wednesday, 26 June 2002
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General Market Analysis
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US indices recorded their fifth straight weekly decline, as investors focussed on overseas tensions, profit warnings and the deteriorating technical position of the markets. Moderately improved economic indicators in the shape of strong housing starts, coupled with unchanged consumer prices in May, were offset by concerns over the record US current account deficit and US dollar weakness. European markets continued their downtrend following the release of poor economic statistics. Industrial confidence figures were down sharply in Italy and French consumer spending also fell in May. Industrial relations became another negative factor, with general strikes in Spain, Italy and within the construction industry in Germany. Japanese equities had the worst week in 15 months as the Topix fell 5.2%. Poor sentiment heavily influenced by weak global markets, a lack of corporate news and little technical support failed to generate any buying incentive. Exporters were sold off as the yen continued to strengthen. Elsewhere in the region, markets were weaker across the board, particularly the smaller markets of South East Asia, which had recently outperformed. Government bonds continue to be a safe-haven for nervous equity investors; prices ended the week marginally higher.
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