In June, global financial markets (stock and bond markets) both demonstrated simultaneous decline, which is possible when market movements are determined not by fundamental indicators, and not even by technical indicators, but by market sentiment.
Currently, the sentiment is most affected by expected further decisions of monetary authorities of the world’s largest economies on implementing economy stimulation programmes, i.e., infusion of funds. During recent months, market players have been carefully following statements made by representatives of the US Federal Reserve, trying to trace the hint pointing to the regulator being ready to gradually cease the QE stimulation programme, alongside monitoring macroeconomic indicators, since their improvement significantly increases the possibility of those hints turning into reality. As soon as such hints appeared, market players tended to shorten positions in risky assets and long-term debt securities (decrease duration), since cutting of stimulation programmes implies increase of interest rates and return indicators. Whereas in case of remarks on necessity to continue the QE stimulation programme, market players increased positions in risky assets and the duration of debt securities.
At the beginning of June, emerging countries bond market and corporate bond market, as well as the global stock market, experienced a decline, following the decrease at the end of May, which was caused by released minutes of the Federal Reserve session of the 22nd of May that the market players considered to be clearly pointing to the regulator being ready to gradually cease the QE programme. In June, the Bank of Japan added fuel to the fire at its session on 10-11 June by deciding to abstain from additional national economy support measures and from extending terms of credit transactions that are used by the same to reduce volatility in debt securities markets. In the middle of June, after released macrostatistics data appeared to be lower than expected in the USA and the IMF decreasing its forecast on the US GDP for 2014, the bond and stock markets started regaining their positions. In the absence of other news, the stock and bond markets had good chances of compensating the losses of the beginning of June, but the results of the Federal Reserve session ended on the 19th of June, and especially the statements by the Chairman of the Federal Reserve Ben Bernanke, did a disservice to those. Based on the session results, the Federal Reserve gave higher estimate to the economic situation and mentioned some improvement in the US labour market, namely, reaching the unemployment rate of 6.5% already in 2014, a year earlier than expected before. The unemployment level of 6.5% is viewed as a key one, and after reaching the same, the Federal Reserve intends to consider an increase of interest rates. Moreover, the Chairman of the Federal Reserve Ben Bernanke, quite unexpectedly and for the first time since economy stimulation programmes were launched in 2008, made a statement on possible closure of QE. Most probably, exactly this statement caused sharp drop of stock and bond prices, and growth of the US dollar, especially against emerging currencies.
The market reaction was overly negative, which was evidenced by sharp price bounce during the last days of June, and this was also supported by comments made by the Federal Reserve regional executives, who tried to soften the statements of Ben Bernanke on the monetary policy retaining its stimulating effect even after termination of QE. Consequently, based on the results of the month, the market of government bonds of emerging countries declined by 5.3%. The market of corporate bonds, due to shorter duration and higher coupon yield, demonstrated much smaller decrease – less than 2% in the market of the US high-yield corporate bonds. Like in the previous month, the markets of bonds denominated in euro appeared to be more stable. In the stock markets, the largest decline was shown by emerging markets: from -1.8% to -14%; in particular, China: -14.0%, Brazil and Turkey dropped by -11.3%, South Africa, Hong Kong, and South Korea: from -6.8 to -7.1%, and the currencies of almost all these countries declined as well. The decrease in markets of developed countries was also quite considerable – from -0.7% to -5.6%, namely, Japan: -0.7%, UK: -5.6%, France: -5.3%, USA: from -1.4 to -1.5%.
During the first half of June, the manager of stock funds, following the strategy announced earlier, purchased stocks given decline of stock markets of developed countries (USA, Western Europe, and Japan).
After the Federal Reserve session and press-conference of Ben Bernanke, the portion of the stocks of emerging markets in the portfolio was reduced, since those most sharply react to liquidity decrease by dropping prices and weakening national currencies.
The strategy for the stock funds in July will be the holding one, retaining part of assets in cash that is planned to be further used for purchasing at declines. The stock markets of developed countries will be preferred for buying. It should be also noted that another season of corporate reports begins in July, and the results of the same might cast light on future middle-term dynamics in the stock market.
The manager of the bond funds expects recovery of bond prices in July, due to overly negative reaction of the market players to statements of Ben Bernanke. The fund manager plans to continue decreasing overall duration of the bond fund portfolios, preferring shorter bonds with high coupon yield. This pattern will ensure more stable value of the portfolios, in case high volatility and negative moods of the market players remain present.
The funds’ performance results as at 30 June 2013 can be found at ABLV Bank home page in section “ABLV Mutual Funds”.