MONTHLY MARKET INSIGHT

APRIL 2014 KEY TOPICS TO WATCH (APR)

Markit PMI Manufacturing (Mar) (1st) Eurozone Q4 GDP Final (2nd) Markit PMI Services (Mar) (3rd) BoE / ECB Interest Rate Decision (3rd) US Non Farm Payrolls (4th) China Q1 GDP Preliminary (8th) UK BoE Interest Rate Decision (10th) Eurozone CPI (16th) UK Q1 GDP Preliminary (29th) FOMC Meeting Minutes (29th/30th)

U.S. FUNDAMENTAL OVERVIEW

The expected $10 billon decrease in Federal Reserve asset purchases was announced in March, to bring the monthly rate to $55billion per month. Historically (over the last year) talk and actions of tapering have created a large selloff in equity markets. However, In March, such movement was muted and consigned to a single trading session with a small decline based upon a hawkish tone denoting that interest rates could rise 6 months after tapering is complete. In preceding comments the Fed chairwoman noted that the economy would require extraordinary support for some time which negated earlier comments and ensured that US markets rose on the premise of prolonged Federal Reserve liquidity/capital. A reason behind the muted initial FOMC response was due to preceding events, most notably those regarding Crimea as referendum and escalation fears were allayed to provide a fresh stimulus (in addition to positive industrial production data) for the S&P 500 to reach new all-time highs on March 18th. Beforehand, the Crimean crisis and Chinese debt fears had created a risk based 40 point sell off. Chinese debt and growth concerns are likely to provide further downwards pressure for US indices if economic data and credit issuance fears are not sufficiently subdued, starting with the upcoming Chinese Q1 estimate. March once again US data was mixed with the excuse of poor weather conditions (which has plagued prior data readings) wearing thin. Slow progress is being made in baseline manufacturing strength but consumption figures are still mixed. This has caused figures to be increasingly variable with weaker than expected final Q4 GDP readings of 2.6% confirmed and Chicago PMI falling dramatically to 55.9 from 59.8. This, alongside further deflationary pressures (with CPI now at 1.1%) and staid employment improvements (6.7%) do not make a compelling case for stock market growth or continued tapering activity, even though both are likely to continue as long as interest rates are low and global recession fears are at a minimum.

S&P 500 (MAR 2014)

FTSE 100 (MAR 2014)

The strength of the dollar may be helping US manufacturers abroad as the Dollar Index (DXY) is towards the bottom of its trading range and is relatively weak at the moment. Dollar devaluation is a sign of continued risk within the US economy, aligned to the deflationary affects to the dollar of continued Federal Reserve asset purchases. As both should be present until 2015, it is unlikely that the dollar will regain significant strength until then.

EUROPEAN FUNDAMENTAL OVERVIEW

The risk presented by the Crimean crisis to European equities and natural resources was short lived (although political risks remain) this has ensured that the DAX has recovered early losses to be near all-time highs once again. Although March provided slightly mixed data, prospects within the Eurozone are gradually improving with recession fears gradually declining due to the apparent effectiveness of ECB bailout programmes against fragile global growth prospects. One area of concern is the continued high exchange rate of the Euro which has caught the attention of the European Central Bank who are keen to exert deflationary pressure and are willing as ever to monitor and take necessary action. However, against a weak dollar this is likely to continue for some time which may jeopardise the pace of recovery due to pressure on export prices. The strong Euro and subsequent volatility does not help the inflationary outlook, which has now become the most credible current threat to sustained growth. In March Consumer Price Inflation (CPI) was a quarter of the intended target (0.5% compared to ECB targets of 2%). Continued rates of 0.5% would ensure that the controversial issue of negative interest rates may be introduced as a final stimuli. The hope from the ECB is that the broad economic recovery seen in other data starts to lift the CPI figures and allow the ECB to have more options in terms of interest rate rises and additional monetary policy. The UK has seen growth expectations heightened in the latest budget from 2.4% GDP growth expected in 2014, to 2.7%. This has been complimented by data that has continued to show underlying relative strength in the economy, although Housing metrics were not as strong in March with softer figures for most of the house price indices and BBA mortgage data. Unemployment still remains above the 7% threshold for interest rate rises, which are likely to happen in 2014 with continued economic progress.

DAX 30 (MAR 2014)

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This article does not constitute as investment advice.