Global stocks were mixed for the week, largely driven by the European Central Bank’s (ECB) move to cut rates further into negative territory. All our major domestic indices posted positive returns with the S&P 500 and the Dow Jones Industrial Average both up over 100 basis points at 1.09 percent and 1.19 percent, respectively. The tech-heavy NASDAQ Composite was up 0.65 percent. European stocks seesawed in response to the ECB with the STOXX Europe 600 Index closing the week up less than 1 percent despite significant up and down days. Asian stocks were down slightly with Japan’s Nikkei 225 Average Index down 0.45 percent and China’s Shanghai Composite Index down 2.22 percent.
Oil had a volatile week as a number of factors were impacting investor sentiment. OPEC’s possible production agreement, global oversupply, and shifts in seasonal production all influenced the price. The market continues to focus on the Organization of the Petroleum Exporting Countries (OPEC) and whether or not they can come to an agreement with other non-OPEC members to cap production and drive up prices. While there is a lot of talk among the member states, it doesn’t appear there will be consensus anytime soon. Indeed, Saudi Arabia has publicly stated it will maintain production at current levels for at least the next five years. These are hardly the words of a country that is willing to cooperate and lower its oil production. In addition, the oil market will likely also suffer from seasonal oversupply as we enter the spring and summer months. Refineries typically ramp up production in spring to keep up with the seasonal demand shift as the summer months tend to have the highest demand for oil and gasoline products. We continue to believe oil prices will remain lower for longer because, as prices move into the $40-$45 per barrel range, more producers will be profitable and ramp up production. This will ultimately increase supply and likely depress prices again, assuming demand stays the same or it does not outpace the growth in supply. In fact, our analysts don’t see oil past $60 per barrel until closer to 2020.
European Central Bank
In what was largely anticipated by the markets, the European Central Bank (ECB) nudged its key interest rate further negative last Thursday in an attempt to lower rates and buoy the European markets. However, the scope of the move was greater than many analysts had expected. The rate was lowered to -0.40 percent, from -0.30 percent, and the ECB expanded its asset-purchase program from $60 billion to $80 billion euros a month which includes corporate bonds. Global equities were generally up in response initially but turned down later in the day when the ECB president, Mario Draghi, said he did not anticipate the need to reduce rates further. Global markets appeared to shrug those comments off and finished Friday firmly in positive territory. While many investors have grown accustomed to central banks maintaining a negative interest rate policy (NIRP), the phenomenon is still very new to the financial markets. Because of this, little is known about the market’s reaction to even lower negative rates or prolonged periods of NIRPs. Going into 2016, the Eurozone, Switzerland, Sweden, and Denmark all had negative interest rates maintained by their respective central banks. Japan jumped into the fray after cutting its key rate below zero in January, but the Japanese equity markets suffered a bout of selling on the news. The Bank for International Settlements, a Switzerland-based conglomerate of central banks, is warning the markets the efficacy of negative interest rate policies could be diminishing. Indeed, they point to the market’s reaction to Japan’s negative interest rates that saw large flows into sovereign government bonds despite many of them trading at negative rates. However, we would note there were other global events that overshadowed Japan’s policy shift and drove investors to seek relative safety in the form of those high-quality government bonds.
Short-Term Yields Rise
Interest rates can be a useful bellwether when measuring the risk appetite for investors. Generally, higher interest rates indicate investors are more willing to take on market risk, primarily through equities and non-fixed income investments. In contrast, lower interest rates signal the market is taking a more cautious approach as investors move into bonds. This dynamic is driven by the relationship between bond prices and interest rates. As investors sell bonds and buy stocks, the prices on those bonds fall and the interest rates go up. The opposite happens when they move back into bonds: yields will fall as the prices go up with demand. According to the data, short-term yields on two-year Treasury bonds jumped to their highest mark since the first week of January as investors started moving into equities. This was primarily in reaction to the ECB’s policy actions and stronger-than-expected U.S. economic data. While this doesn’t guarantee a permanent shift in investor sentiment, it is an indication the markets are willing to wade a little deeper into the equity markets and take on some more risk.
Fun Story of the Week
Have you ever wondered why buttons for men’s shirts are on the right but on the left for women? There are some interesting theories as to why there is a difference and it serves as an everyday reminder of the history of clothing, tradition, and warfare. Yes, warfare. For men, having the buttons on the right can be traced directly to military dress. Men often wore swords and, being the majority of people are right-handed, that meant the sword and scabbard were worn on the left. One of the more prominent theories is, when sword fighting, men would typically reach across their body to grab the sword on their left while unbuttoning the jacket with the left hand to allow for more flexibility. This, of course, doesn’t explain why women’s buttons are on the other side. There are a few theories that attempt to explain the difference and one such theory has to do with horse riding. Women who rode horses did so sidesaddle, facing the left side of the horse. By putting buttons on the left side, it helped reduce the breeze that would flow into the shirt as they rode along. Another theory, and perhaps a more reasonable one, posits that, when clothing was becoming standardized, many women did not, in fact, dress themselves. While it may be hard to believe today, buttons were once very expensive and were a favorite of the wealthy. So, when women wore elaborately buttoned clothing, having the buttons on the left side made it easier for the servants to help them get dressed.