Stellar Q1 gives way to cautious second quarter
LONDON, March 31 — After a bumper first quarter fuelled by central bank largesse, investors are looking for potential potholes to derail a stock market rally which has already shown signs of tailing off in recent days.
While a holiday-shortened week is not likely to prompt dramatic investment decisions, the consensus for now is that there may be more gains ahead but at nothing like the same pace.
“The upside potential in the equity markets is not exhausted yet; however, we no longer expect above-average returns in the coming months,” said Philipp Baertschi, chief strategist at wealth manager Bank Sarasin.
Equities have certainly been going great guns.
The S&P 500 is set for a 12 per cent gain since the start of the year and, despite wobbling over the past week, Japan’s Nikkei is still up more than 19 per cent, its strongest first quarter rise in 24 years.
Aside from signs of a burgeoning US recovery, the turn in sentiment was powered by the European Central Bank’s creation of more than a trillion euros of three-year money, augmented by more money printing by the Bank of England and hopes that the Federal Reserve would do the same.
A repeat dose is now looking less and less likely, making for a very different investment climate, despite warnings over the past week from Fed chief Ben Bernanke and the Bank of England’s Mervyn King that recovery remains highly uncertain.
Reuters’ latest asset allocation polls showed global investors cut government debt from portfolios in March, slashing holdings of US bonds to a six-month low as hopes for more Federal Reserve bond-buying faded.
“Government yields, close to generational lows, still look unattractive and we expect Treasury yields to bubble higher over the next few months as the euro zone risk premium is unwound and as the market adjusts to the reality of better economic data,” said Nick Gartside, International CIO for Fixed Income at JP Morgan Asset Management.
For developed markets, European purchasing managers’ indices — which have a strong correlation with GDP — will be a must-watch in the week to come as will equivalent reports from China.
As the PMIs will do in Europe, so Japan’s tankan survey of major manufacturers will offer a gauge as to how far the Nikkei’s rally could stretch.
The biggest report of the week will be US non-farm payrolls, out on Good Friday when the rest of the financial market world is closed.
The European Central Bank and Bank of England will hold policy meetings before the Easter break. Neither will shift course but debate about the policy turning point is now evident, at least within the former.
Jens Weidmann, who heads the German central bank, is leading a push by a group of ECB policymakers for the bank to prepare for a shift to exit mode, fearing that inflationary pressures will be stoked and banks will become completely addicted to state support.
Investors will also pick over the details of Spain’s 2012 budget, which faces implementation risks, and the details of euro zone plans to build a stronger firewall which appear to have settled on a less ambitious option than some members were seeking.
After strong runs by the major world stock markets there are suggestions that select emerging markets may be the next beneficiaries.
Reuters polls published on Thursday predicted emerging markets will spearhead any further rise of global stocks this year, with Russia and Brazil leading the way.
Gartside highlighted Russia’s successful sale of US$7 billion (RM21 billion) in Eurobonds in the past week.
“Emerging market debt continues to be one of our top picks as do other spread sectors such as high yield, where both fundamentals and valuations look good,” he said.
The coming quarter will certainly throw up further euro zone risks and high oil prices pose a real threat to the world economy.
Aside from the market verdict on the bloc’s bailout arsenal, elections in Greece could weaken austerity resolve and the French may elect a socialist President intent on rewriting the bloc’s new fiscal rules.
“We think that the current benign phase in the European markets could continue for several more weeks. Nonetheless, we believe that volatility and wider spreads will return to sovereign bond markets in the not too distant future,” Justin Knight and Beat Siegenthaler at UBS wrote in a client note.
The International Energy Agency (IEA) said oil consumer nations are set to pay a record US$2 trillion this year for oil imports if crude prices do not fall. Crude hit US$128 a barrel this month, only US$20 short of its 2008 peak, and is up more than 15 per cent since January.
If crude were to stay there for the rest of the year, oil import bills would cost 3.4 per cent of GDP, up from 3.1 per cent in 2011, IEA chief economist Fatih Birol said.
“The crude oil price remains at a high level and uncertainties over Iran do not suggest a quick downward correction. How will a weak recovery be able to bear an energy bill that could remain high for a long time?” Credit Agricole analysts asked in a note to clients. — Reuters