Spectacular rally in US markets, Europe to follow

Markets yesterday were eagerly awaiting news from the US Federal Reserve signaling a change in its interest rate policy. Fed Chairwomen Janet Yellen said that a rate increase is possible at every meeting, although she did not foresee a rate increase ‘at least in the next couple of meetings’. Markets are interpreting the statement as an indication that the Federal Reserve will remain accommodative for the time being. More importantly the comments are evidence that the US Federal Reserve has faith in the strength of the US economy.

US stock markets yesterday increased by a huge 2.0% as energy stock rebounded from recent lows. US Stock index futures also advanced indicating that US equities will extend gains later today.

Asia

Asian stocks rose, following the biggest increase in US shares since October 2013. Asian stocks have been comforted by the economic outlook in the US. It appears that the US is slowly replacing China as the balancing market in global stocks. For years Chinese demand for global products balanced weak demand in other regions. However, we are now observing a shift as Chinese demand weakens while US economic data continues to improve. Eventually we expect the US to resume its traditional role as global economic growth driver. In the short term this may mean weakness in emerging market assets, especially in Asia. Asian markets will initially find it difficult to adjust as expectations of a stronger US economy will drive investors to shift their funds from these markets back to the US.

Europe

My colleague Kristian appears to have correctly called the bottom in European stocks price movement early this week. European equities opened positively this morning with our current favorites, airlines, up strongly. AirFrance is up 2.4%, while Lufthansa is up 0.6%. Easyjet is up 1.12%.

Allianz

Pimco, the world’s largest bond fund manager and fully owned by Allianz, posted record outflows of over $5.8Billion this year up to November. Pimco continues to be a headache for Allianz since cracks in the relationship between top management appeared early this year. Infighting eventually led to bond legend Bill Gross leaving the firm. Despite the problems at Pimco Allianz continues to outperform the market and give regular dividends of around 4.0%.

Airbus

Following a disastrous week were Airbus downgraded their sales forecasts, Airbus have announced a management reshuffle. Airbus has historically focused on the interest of its main shareholders, the French and German governments. A shift towards a more industrially friendly management should improve the basis for better financial performance in the future. Airbus, never one of our favorite stocks due to excessive government intervention, may be attractive at current prices.

Barclays

Provisions set aside by Barclays to settle allegations of rigging may not be enough. The stock continues to underperform the market as the bank continues to be involved in malpractice issues. Unless Barclays starts coming out clean with its customers the stock price in unlikely to outperform. Probably better opportunities exist in other UK and European stocks.