Today, almost one hour ago, Fed Chairman Janet Yellen spoke about the Federal Open Market Committee’s decision to leave Federal Funds rates unchanged. The status of the American economy is not sound enough to justify a unanimous rates hike at this specific moment. Labor conditions have improved but not to a satisfactory level. Consumer spending has been sluggish, Retail Sales reported modest improvements. Inflation has not reached yet the target of 2%, although Oil price decline boosted consumer’s purchasing power. Fed Chairman sees in the forthcoming months moderate growth, and a modest but stable recovery. If the US economy will meet the Committee’s targets, the hike will come. The Financial Community warned against a premature rates increase, notably Christine Lagarde from IMF. Federal Reserve representatives see the second half of 2015 as most likely for a change in Monetary Policy. Bond prices have already started to adjust to possible inflation spikes, both in Continental Europe and US. American Equities have digested relatively well the news, reporting moderate daily gains.
Let’s see what the next Fed statement will tell us.
This week, financial markets have been led in their upward trend by the voices coming from Central Banks. On Tuesday, two ECB officials, Coeuré and Noyer, declared that the European Central Bank is purchasing in May and June larger amount of assets, in order to cope with the issue of scarce liquidity in the bond markets between July and August. This news pumped up all major European Markets as leading the dollar into a new surge, reaching EUR/USD 1.1009. During this week, a various number of meetings occurred between Greece and European officials. In Monday, Athens officials assured the public that a potential deal with IMF and creditors was likely to be reached. From Wednesday, rumors spread the news that Greece will not be capable of paying back the $305m tranche to the IMF, which in later days appears to be confirmed. I agree with the voices that see the Exit of Greece, the so-called Grexit, as a potential Lehman Brothers alike financial disaster. Not considering the political disaster the crash of the European Union would mean this event would shake up all assets classes very badly. The anomalies in the German Bond Market in the past few weeks showed how fragile the situation is by now. At this level of prices, especially in peripheral Europe, Grexit (in my opinion) would cost a 30% crash in the markets, and unquantifiable difficulties in the real economy. In Markets, sell-offs are more brutal and violent then upward movements. A CRISIS CAN BE ANY MOMENT AT YOUR BACK. Plan Carefully. On the Macro side, the ZEW Index, which measures the Economic conditions of Germany, based on economists’ consensus, was below expectations: Economic Sentiment at 41.9, EXP 49.0. Nevertheless, German DAX was able to report a weekly 3.21% settling at 11815. FTSEMIB closed at 23782, +1.31%, IBEX 11554, +2.1%, FTSE100 7013, +0.76%, CAC40 5143, + 2.99%, Lisbon PSI20 6102, -0.3%.
On the US market operators’ sentiment was mainly driven by earnings’ results coming from Retail Giants, and macro data. Wal-Mart Inc., failed in meeting expectations, quarterly EPS was 1.03, EXP 1,04. Home Depot beat the estimates with q. EPS 1.16, EXP 1,15. Target on Wednesday beat the estimates with q. EPS at 1.1, EXP 1.03. Lowe’s missed analysts’ expectations, reporting q. EPS at 0.7, EXP 0.74. Retail Earnings are very important in America because they mirror the consumer’s spending attitudes. Retail Sales on a macro level fell. Wal-Mart showed lower sales growth rate than expected. Consumers do not seem aligned in giving up money for spending. On the macro side, from the housing market, Housing Starts MoM increased 20.2% and Building permits MoM 10.1%. Real Estate data are a very important indicator of the soundness of the Economic recovery in US. Increased starts mean more contracts signed and more inflows of liquidity, making the market more flexible to meet demand and to expand one of the invoices of Consumer Spending. The FED published the minutes of the FOMC on Wednesday, in which FED officials observed that a rise in interest rates may be expected for the next semester. No major macro indicator is expected to be published next week. Volatility in the market will be triggered by developments of the situation in Greece. DJI closed at 18351, reporting a weekly -0.22%, NASDAQ 5085, +0.81%, S&P500 2126, +0.16%.
On the other side of the financial world, the Nikkei topped multi-year high reaching 20264 and a weekly performance of +2.69%. Wednesday, GDP data have been released. Abe’s Japan topped estimates: 0.6% increase on a Quarterly basis, EXP +0.4%, and +2.4% on a Yearly basis. This long rally lead the Index to levels never reached after 2000. The Hang Seng closed at 27992, with a weekly +0.39%. KOSPI closed at 2146, with a weekly +1.89%.