Economic Outlook January 2015

January turned out to be a solid month for global equities. Europe outperformed the US by a large margin.

Bloomberg European 500 gained 6.91%, while the S&P 500 fell 3.10%. Nikkei 225 rose 1.28% while Oslo Børs ended up 3.50% in January. All numbers in local currency. In currency markets we saw a continued trend from last year with the EUR continuing to slide against the USD, and ending the month at EUR/USD 1.1291 down from 1.2098 at the beginning of the year. Oil price continued sliding, and ended the month down 7.57% to USD 52.99/bbl. 

Even though the labor markets continue to show strong reading, other statistics out of the US economy were softer in January. Retail sales came out weaker, partly hit by fall in nominal gasoline sales due to lower prices. However, it was not enough to explain the whole drop. Overall US production also came in weak at -0.1% as expected. That said, the prior two months were strong so it is too early to read too much into these numbers.

January was an eventful month for European investors. On the 15th of January the Swiss National Bank (SNB) announced it is ending its currency peg against the euro. Three years ago the central bank began currency interventions when many investors fled from the EUR to the CHF. Since then the euro has depreciated, and the US dollar has appreciated sharply. Due to the peg against EUR, the CHF has also weakened against the dollar. The SNB expected that the ECB would unveil measures that would further weaken the EUR, making it difficult for Switzerland to continue maintaining the same CHF/EUR exchange rate. When the central bank ended its interventions, it also cut its key interest rate further below 0. The result was a sharp rally in the CHF.

On January 22nd the European Central bank announced a QE program that was more forceful than expected. The ECB will start buying bonds issued by European institutions and euro zone government bonds totaling EUR 60 billion per month. These comments caused the EUR and government bond yields to fall and stock markets to climb. On Monday 26th of January the EUR fell further after the leftist anti-austerity party Syriza was even more successful the expected in the Greek election. Financial markets took the outcome relatively calmly, with the perception that Greece and the rest of the European Union will reach a solution. A Greek exit from the EUR would be devastating first and foremost for Greece as all debt is in EUR and the Drachma most likely would fall sharply if Greece were to step out of the EMU. 

Towards the end of January S&P lowered its credit rating of Russia to high yield (BB+), which is the level below investment grade, for the first time in 10 years. A few days later the Russian Central Bank announced a 2% cut in its key interest rate to 15% motivated by falling inflation expectations. The fighting continued in eastern Ukraine after the attempts of peace talks in Minsk, the capital of Belarus, failed. The EU decided to extend the current economic sanctions against Russia.

We do see volatility to remain at a higher level than we have seen for the last two-three years. However, with interest rates pressed closed to zero investors must take on some risk to keep up purchasing power. We believe low interest rates, solid US growth, central bank liquidity support and lower energy prices will continue to be positive for global equities. We still see downside in the EUR, but there are signs that the trend of US outperformance relative to Europe are halting, and that funds are flowing out of US equity markets and into European markets. 

By Hans Kristian Hals, Head of Investment Strategy