Global fund managers report huge outflows of capital

Apple and Alphabet Jockey for Top Spot

Two of the world’s biggest tech companies – Apple Inc. and Alphabet Inc. – are in an unofficial battle for dominance for the top spot. Apple has borne the brunt of equity price weakness, plunging substantially over the past year. It hit its lowest price in almost two years and dragged the Dow Jones Industrial Average lower. After shedding 2.4%, Apple was down to $90.34 a share, and in the process it erased 15 points from the Dow Jones. While iPhone maker was on the decline, its market capitalisation fell below that of Alphabet Inc. However, by the end of the trading day, Apple assumed its mantle as world’s most valuable company by market cap. By the close of the day on Friday 13, Apple was valued at $495.82 bln and Alphabet was valued at $488.02 bln.
These tech giants notwithstanding, there have been all manner of issues dragging equities lower of late. These include the most important element of all: loss of confidence in central bank policy. The Bank of Japan, the Bank of England, the Federal Reserve Bank, the European Central Bank and others have been unable to instill confidence in declining economies. Japan in particular has been hard hit by central bank policies, as part of Abenomics. The Eurozone is facing its own pressures with stagnating employment and slow growth. The introduction of negative interest rates has hurt investor sentiment too. Oil prices have been in the doldrums of late and are only now starting to improve. The latest price for Brent crude oil is $47.83 a barrel and WTI crude oil is $46.21. Large US retailers have posted poor performance figures and guidance is less optimistic than at the start of the year.

The US Treasury Spread Tightens to Multiyear Lows

 Clearly, buyer sentiment is lacking as there are few enticements for traders to jump into the market. There is increasing evidence that a recessionary flare-up may be entering the US market. On Friday the 13th, the spread between the 2-year US Treasury note and the 10-year note tightened and fell as low as 94.9 points. This proved to be the lowest level since March 8. But more importantly, this is the lowest level in over eight years. The performance of the US economy has been mixed of late. The S&P 500 index rallied by as much as 12.7% since its lows in February, and profitability from corporate America is expected to post poor earnings, after three successive quarters of an earnings recession. A big part of the reason why corporate profitability is on the decline is the strength of the USD. That has weakened to a degree lately, but the problems in emerging market economies remain. US corporations and others around the world are also engaged in financial engineering whereby they conduct stock buybacks, and other programmes that are geared towards investors (thanks to cheap borrowing costs). That the US economy has endured 83 months of growth is substantial and goes as far back as 1857 according to the US National Bureau of Economic Research. This places the current expansion at #4 on the list, with the strongest period of uninterrupted growth being recorded between 1991 and 2001, with a duration of 120 months.

Major Economic Concerns Ahead

But the short-term prospects for the US and global economies are pockmarked with all manner of financial concerns. These are not restricted to oil price woes, or the actions taken by the People’s Bank of China (PBOC).
Concerns span far and wide including the upcoming referendum on June 23 in the United Kingdom on whether the it should vote for a Brexit. The US dollar and the British pound have had an interesting relationship of late. While many forex traders expect the Brexit issue to be the main driving force for the USD/GBP currency pair, it has lessened in significance. There are other factors that are taking on more importance when it comes to determining the value of this pair in particular, notably the likelihood that the Fed will raise interest rates, given that none has taken place this year. This is keeping the value of the USD weaker relative to the GBP. The absence of a Fed rate hike acts to offset any GBP weakness that is evident as a result of the upcoming referendum. While it cannot be denied that a Brexit will cause the GBP to crash relative to other currencies, a no-vote does not guarantee its strength. If the Bank of England decides to drop interest rates, that would benefit the USD, but the problem is that US data is hardly positive either. These push/pull factors are creating tremendous uncertainty in the currency markets.
Other concerns include the upcoming Spanish elections, and of course the US presidential elections later in the year when voters will get to choose between the Republican contender Donald Trump and the Democrat Hillary Clinton. So far, some $90 bln worth of redemptions have been made from global equity funds. Despite improved consumer confidence numbers and upbeat US retail numbers in April, the S&P 500 index has barely made any gains for the year to date. Investors have also been confused by the policies of the ECB and the BOJ as the efficacy of negative interest rates has come into question. Overall, the number of investors who remain optimistic about Wall Street has diminished greatly. To put things into perspective, $1.1 bln of cash inflows in high-grade US corporate data has been recorded, some $3.5 bln worth of capital has been injected into global bond funds in early May, and $5.1 bln has found its way into money market accounts.

Please note that this column does not constitute financial advice.