Market forecast: overcast

As winter runs its course, the gloomy weather settling around the Eurozone seems to also be dwindling on financial markets. Weak economic data has this week emerged out of the Eurozone, the United Kingdom and China, hand in hand with new dovish measures undertaken by the Bank of Japan (BOJ) and the people’s Bank of China (PBOC).

The only positive data of the week so far was seen in Eurozone unemployment data yesterday, which came in lower than expectations of 10.4% at 10.3%. The figure was driven by German unemployment maintaining February lows of 6.2% and continuing its decline from post-crisis highs of 2009. Conversely, German and Italian manufacturing PMI were flat for the month yesterday, adding to the weak CPI data for the Eurozone released on Monday. Given the bleak data, European markets rallied on further investor expectations that the ECB vote on March 10th will more than likely be in favor of further quantitative easing.

Weak economic data was not limited to the Eurozone as the United Kingdom’s PMI data came in unexpectedly below expectations of 52.9 at 50.8. The fall reflects domestic weakness in the UK in hand with lower export demand for its products. The sterling has weakened however over the past week, hence the latest data may not yet fully reflect this fact.

The United Kingdom faces a challenging next few quarters, where fiscal and monetary policy measures may well have to be kept on standby should economic data continue to deteriorate. A continued fall in the Sterling against a number of its peers may very well offset the lower exports demand short term, but heightened fears of a Brexit from the Eurozone and the possibility of Scotland seeking to leave the UK may very well spark increased capital outflows from the UK forcing the Bank of England to act.

China and Japan are also struggling to re-ignite consumer confidence. Chinese PMI yesterday fell for a second consecutive month, highlighting a further slowdown in the economy. The data comes after the PBOC lowered its deposit requirements that Banks must hold in reserve by 0.5%. The move could have added negative repercussions on the Chinese Renminbi as the currency is already under pressure from investor concerns of diminishing foreign reserves.

Japan meanwhile has for the first time issued a 10 year bond yesterday at negative yields. This means that investors are paying the BOJ to lend it money, emphasising the concerns investors have with the economic policies of Prime Minister Shinzo Abe.

In the U.S., the wider spread levels currently being seen in high yield debt securities are above the historical averages for non-recessionary periods, highlighting possible value in the asset class, supported by some investors and fund managers taking overweight positions in U.S. high yield.

Just as the winter weather is left to progress, we may be closer to having to accept the same fate for financial markets. By allowing the market volatility to run its course and letting the market determine new levels for global currencies and asset classes, only then may fiscal and monetary policy measures start to have any possible effects, once global fears and market volatility have stabilised.