It’s been an edgy week for investors. Fears of a US recession are rising, with recent industrial production and manufacturing data proving disappointing. Exports have been hit by the strong dollar and weakness in China. At the time of writing, the S&P 500 index has fallen over 9% this year alone.
In a US Congress hearing on Wednesday, Federal Reserve chair Janet Yellen acknowledged the risks, while investors have now all but ruled out further rate hikes in 2016, especially if bond yields are anything to go by. The yield on 10-year Treasuries fell close to post-war lows, reaching levels last seen in 2012.
It’s been a similar story for the UK. On Thursday, the FTSE 100 index fell to its lowest level since July 2012 (and is down 5.3% in the week to Thursday). UK investors have also shunned stocks for the safety of bonds – the 10-year Gilt yield fell to an all-time low of 1.26%.
Meanwhile, German government bond yields reached a nine-month low and European stocks have been hit hard. The Swedish central bank cut rates further into negative territory in a bid to drive inflation and spur growth. The Bank of Japan has also resorted to using negative interest rates in an attempt to stave off deflation.
Profits slip
Much of this deflationary pressure stems from the collapse in the oil price, which is also having an effect on the corporate world. Rolls Royce cut its dividend in half and announced further job cuts as demand from energy clients fell. Maersk, the Danish shipping giant often viewed as a bellwether for global trade, spoke of a “massive deterioration” in its business because of the low oil price.
Bank stocks rout
Banking stocks have been hit particularly hard amid a perfect storm of record low interest rates, volatility and emerging market weakness. In Europe, banks also face challenging new EU rules on corporate bankruptcy. In response to the massive bailouts of Citigroup and Royal Bank of Scotland following the financial crisis, there are fears that new regulations will impose greater losses on bank bondholders, rather than taxpayers, in the event of default.
Deutsche Bank faced particular challenges because of worries about its contingent convertible bonds, or “CoCos”. There were fears that falling interest rates would hit the company’s profits and it would become the first major bank to fail to make coupon payments on this relatively new type of debt. However, shares in the company bounced back from 30-year lows after it announced plans for an emergency bond buyback.
Top Trumps
It was a good week for property entrepreneur and US Presidential hopeful Donald Trump as he won the New Hampshire primary by a 20% margin over his nearest rival, John Kasich. The result was welcome news for the billionaire who, against expectations came second to Ted Cruz in the Iowa caucus last week. Never one to mince his words, Trump said he would “easily beat Democratic rival Hillary Clinton” if elected the Republican nominee. Trump may have picked the wrong target as Vermont senator, Bernie Sanders, surprised many by thrashing Clinton in the Democratic primary. Voters rallied to a call from the self-proclaimed socialist for “political revolution” – a clear sign of the American public’s discontent with mainstream US politics.
And Finally…
A man in the city of Chhattisgarh, central India, found himself butting heads with his neighbour this week. The man’s pet goat is accused of grazing on some delights in next-door’s garden. The long-suffering neighbour – who happens to be a judicial magistrate – alleged that the goat had repeatedly feasted on his flowers and vegetables. As police arrived, the owner attempted to pass the buck before reportedly bleating, “You’ve got to be kidding me!” as they were led away. Goat and owner are in custody and both now face up to seven years behind bars. Some might call it gruff justice, but a lengthy sentence will let them ruminate on their behaviour.
