Global interest rate scenario to drive developments
At the beginning of 2014 quantitative easing in the US was still in full swing and the “taper tantrum” of mid-2013 seemed to have been forgotten.
Greater liquidity encouraged risk-taking, driving US and selected emerging markets higher. The JSE and Dow Jones industrial were no exception.
Doubts then developed about how long equity markets could sustain high valuations. The dip in October caused a scare but by mid-November this was already forgotten. The Dow Jones on November 14 was up 6.49% on the year, trading at a new high of 17,653.79. The S&P 500 grew 10.33% for the year to date.
The JSE climbed 9.37% in the year. At an average price:earnings ratio of 17.3, the all share is not cheap any more. Analysts say it is harder to find value.
Yet global markets are still supported by loose monetary policies. The US Federal Reserve is expected to start the hiking cycle in mid-2015, but Fed chair Janet Yellen says rates could stay low long afterwards, depending on how the economy reacts.
US Treasuries have, contrary to expectations, firmed in response, as the capital market became the new safe haven. Yields on the benchmark 10-year US Treasury have so far this year firmed 67 basis points to 2.35%, after weakening to 3% in 2013.
The Bank of England is in no hurry to hike rates, disregarding its own guidance last year to start the process if unemployment dropped below 7%. The European Central Bank is grappling with disinflationary and negative growth concerns in the euro zone. Even Germany is stumbling in industrial production.
These realities have kept the dollar on the front foot and commodity prices have dropped to five-year lows. The euro has lost 9.7% against the dollar to mid-November and the greenback has gained 6.7% against the rand.
After falling in 2013, the gold price has fallen a further 3.8% so far this year and platinum is down 13%. The biggest fall was in oil, Brent crude dropping 29% to mid-November.
GDP growth in the US has improved, but remains near zero percent in the eurozone. In SA projections in 2014 have been cut to 1.4% from 2.7%. A rise to 2% is seen for 2015. China is expected to grow at 7.1% this year, but could fall below this level in 2015.
Volatility is sure to be the watchword in 2015 as the global interest rate scenario unfolds.