Quiet markets as terrorist murders return

24 March 2016

Had complacency returned? Not regarding terrorists threatening our way of life I belief. After last week's arrests in Brussels, there was an awareness that there were more highly prepared and violent suspects on the run, but it surprised how quickly they struck after they were disturbed. While I mourn with the people of Brussels I find it encouraging how the fanatics' aim to spread terror is not succeeding on the larger scale. Pan-European travel continues as the Easter Weekend approaches and capital markets hardly budged.

That these attacks happened in Brussels, where the cell that was also behind the Paris murders was '˜at home', tells me that our defences are already at a level that no longer permits the terrorists to roam as they please. This would suggest that Daesh/ISIL is on the retreat, not in the offensive as feared after Paris. Police cooperation and effectiveness will need to improve across Europe, which I am sure will happen, just as it did in the UK once the IRA started its bombing campaign here. The threat not just to our open societies but also to the economy that I wrote about after Paris last year, has in my view actually been reduced through this latest atrocity, because it had desperation and retreat written all over it.

Back in the economy, news in the UK was dominated by revisions to the Chancellor's budget, which were not entirely unrelated to other key issues this week, namely BREXIT, bond and credit markets (on the back of the recent move by the ECB), and Oil prices. Oil indeed became the driving theme once again as the price bounce back that started in February petered out as the price of a barrel of oil reached $40.

This became a test for capital market sentiment, because many believe that only a more stable oil price of at least $40/bbl will reconcile with a continuation of the resilient growth path as we have observed, despite the markets suggesting otherwise at the beginning of the year. Due to the ongoing importance of the oil price we are therefore dedicating a detailed article to the topic.

In other news, after a string of very encouraging macro-economic reports from around the world, the past week saw the first return of more mixed data, as February's durable goods orders in the US disappointed (think industrial investment). This stood in contrast to hawkish comments from some Fed FOMC members who publicly suggested the next rate rise should take place sooner rather than later.

This together with the stalling of the recent oil price rally put pressure on market sentiment and we experienced the first down day (Friday) of any significance for a few weeks. Although in later trading in the US markets reversed earlier losses and closed unchanged for the day and the week. We are monitoring these developments closely because we see government bond prices once again at such elevated valuation levels that a correction feels inevitable.

This would encourage us to reduce bond exposures in portfolios. At the same time, however, market nervousness could still strike again if the oil supply glut remains without a counter strategy of production cuts or the economic data flow doesn't continue as positively as of late. We therefore will for the time being continue with our '˜wait and see' stance of a neutral asset allocation position, all the while we are happy to report that all our portfolio strategies are back in positive return territory for 2016.