ECB Reignites Equities Markets

Weekly US equity fund flows hit new highs in 2016 with billions of dollars flooding into the beleaguered major averages in early March. The powerful resurgence of US equities marks a dramatic turnaround from their year-to-date performance. Headlines across the world reported the positive sentiment in US equities as the S&P 500 index reached its highest level for the year-to-date. The Dow Jones Industrial Average closed 218.18 points higher (+1.28%) at 17,213.31, the S&P 500 index closed 32.62 points higher (+1.64%) at 2,022.19, and the NASDAQ composite index gained 86.31 points (+1.85%) to close at 4,748.47. In Europe, equities gains were far more impressive with major averages finishing strongly in the black. The FTSE 100 index rose by 103.09 points (+1.71%) to close at 6,139.79, and the CAC 40 index jumped by 142.44 points (3.27%) to close the day at 4,492.79.

Renewed Interest in Equities

One of the most positive developments taking place has been the renewed interest in emerging market economies. Recall that EM countries have been avoided like the plague since the equities crash in China. Weakness in Chinese demand for commodities has all but crippled the economies of China’s suppliers, many of which are BRICS countries. Now however we are seeing a reversal and renewed interest in emerging market economies with greater exposure to the stocks of these countries. In fact, March 2016 marks the highest level of investment in emerging market funds in just over two years. Deep-seated concerns about the deflationary effects of negative interest rates, stagnant wages, poor employment prospects and generally sluggish economies across the board have been temporarily allayed by recent developments. Fund managers remain concerned about the structural weakness in the Chinese economy, despite assurances from the Chinese Finance Minister that his country will do everything in its power to maintain a 6.5% – 7% GDP growth rate in 2016.

Meanwhile, US unemployment is holding steady at a low rate of 4.9% and strong non-farm payrolls growth in February (+242,000) has emboldened traders to go bullish on the US economy. For now, global fears appear to have subsided as evidenced by the remarkable performance of equities markets in March. Things started to take a turn for the better after the Chinese Lunar New Year ended in mid-February 2016. Since then we have seen ramped up production at Chinese steel mills across the country, precipitating a sharp increase in the price of iron ore (+19% in one day of trading) to over $63 per dry tonne. The gains made by metals such as iron ore and steel appear to be holding – that is unusual given the highly volatile nature of commodities such as iron ore0, copper, crude oil and others. The current price of iron ore for delivery to Qingdao, China is $57.09 per dry metric tonne – $6 off the $63.74 figure from Monday, 7 March 2016.

Fed Rate Hikes Now Expected in April

The money that is flooding back into equities markets in the US is partially being redirected from Treasuries. For the week ending Friday, 4 March 2016, over $320 million worth of Treasuries redemptions were reported. Part of that money has found its way back into equities markets. The sharp decline in US major averages for 2016 found much-needed relief on Friday, 11 March 2016. While US stocks have lost as much as 11% for the year until that point, Japanese and German major averages remain at least 10% lower for the year. That was the fourth week of solid gains by the S&P 500 index, and European stocks followed much the same pattern. For emerging market economies like South Africa, Russia, India, Brazil and China, the tide may slowly be turning. The timing of an ECB stimulus could not have been taken at a better time; the US economy appears to be on the mend with strong figures all around. However, there is a still a lot of whipsaw activity in European bourses as confidence in economic growth prospects remains low. Still, the fact that the S&P 500 index officially crossed over its 200-day moving average line is a major positive.

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Following the Fed statement on March 16, the USD initially lost ground against a basket of currencies. However, the twin bomb blasts in Brussels resulted in a rapid shift towards the world’s safe-haven currency – the USD. Now the greenback is rapidly gaining value as evidenced by the US dollar index. For now, an April rate hike is definitely on the cards as the MSCI emerging markets index clearly shows an uptick in overall global performance.

Author Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting company –InterTrader.

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