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Sand dunes

Market Bulletin - Sand storms

30 March 2015

After reaching new highs, Middle East tensions trigger renewed volatility in equity markets.

After a brief flirtation with new highs early in the week, UK equities joined other major world markets in staging a retreat amidst a renewed bout of volatility. A number of factors contributed to the nervousness amongst global investors, including some disappointing US economic numbers; but most notably the escalation of the military conflict in Yemen added to the list of geopolitical risks that continue to test the markets’ resolve. The Saudi-led coalition, which has the support of US President Barack Obama, is defending Saudi Arabia’s neighbour Yemen from anti-government Shia Houthi rebels, who are backed by supporters of the former president and, it is believed, Iran. Friday saw the third night of bombing by the coalition’s warplanes as they attempt to halt the rebels’ advance on the port of Aden.

The renewed instability in the Middle East came as the US Department of Commerce confirmed that US GDP expanded at an annual rate of 2.2% in the last quarter of 2014, just shy of expectations. End-of-quarter profit-taking was another factor contributing to the retreat. The FTSE 100 Index ended the week down 2.39%, as the political uncertainty of the forthcoming general election also unnerved investors.

Stocks on Wall Street rose on Friday, but not enough to offset losses on the previous four days. The S&P 500 index was down 2.3% on the week, and dropped into negative territory for the year. The wariness of traders is underlined by the fact that the S&P 500 has gone 27 days without recording two consecutive sessions of gains, the longest such stretch since 1994.

Continuing uncertainty over the timing of when the Federal Reserve might raise interest rates also affected investors’ mood. Confirmation that American consumer prices rose in February added to evidence that underlying inflation is strengthening, thereby leaving the door open for a possible rise this year. In a speech in San Francisco on Friday, Janet Yellen supported this view by saying that the central bank might raise rates “sometime this year”, and stressed again that any rises would happen gradually.

Tokyo’s Nikkei 225 index also lost ground over the week on the back of poor Japanese economic data. Household consumption declined for the 11th consecutive month, while retail sales were worse than expected. These factors, coupled with lower oil prices, have pushed Japan to the brink of deflation, highlighting the difficulties faced by policymakers in reviving the world’s third-largest economy.

Uneasy relationship

European equities also rose modestly on Friday, but the FTSEurofirst 300 Index registered its first weekly loss for the year, declining 2.06%. The continent’s tourist industry is hoping that the euro’s decline leads to a strong season this summer. The weaker currency and the ECB’s quantitative easing programme are certainly creating a holiday mood in European equity markets, attracting US equity investors who have invested a record $9 billion so far in March. Figures this week confirmed that business activity in the eurozone has accelerated to a four-year high, with growth in new orders for the manufacturing and service sectors at its highest since May 2011. Export orders have surged to an eight-month high, raising hopes that the ECB’s measures are stimulating the real economy.

On a less positive note, George Osborne warned this week of the increased risk of an accidental Greek exit from the eurozone because of the “palpable ill-will” between the two sides. Relations between Greece and Germany appeared to hit a new low on Monday when Alexis Tsipras, the Greek prime minister, suggested that Greece was due reparations for Nazi war crimes. Earlier in the week, the Greek deputy finance minister claimed that the government could cover pension and civil service salaries due at the end of the month, but could not give any assurances about a €450 million payment to the International Monetary Fund due on 9 April. Over the weekend, Greece’s international creditors mulled over plans submitted late on Friday for a series of reform measures to raise €3 billion, in the hope of unlocking the €7.2 billion bailout it needs to stay afloat. But the anti-austerity government insisted that the country’s liquidity problem would be solved by tackling corruption and tax evasion and that it would not implement any recessionary measures to cut wages, jobs or pensions.

Bruce Stout of Aberdeen Asset Management put the debt-repayment challenges into a historical and pertinent context, pointing out that Germany only paid the final instalment of reparations from the Treaty of Versailles in 2011; a bill which totalled the equivalent of €325 billion, but which was less than Greece has received so far.

Stout underlined the problems in resolving the eurozone dilemma, “49% of Germany’s GDP is export-driven and the country needs a weak euro to maintain its competitiveness. The euro would strengthen if the weak countries leave – there is surely a good chance that Portugal and Spain would follow Greece out of the exit door. These countries still face huge challenges. Portugal’s debt-to-GDP ratio is 363%, which is effectively priced for bankruptcy, and I worry where the sustainable growth is going to come from in economies which are so tourism-based.”

Is this the bottom?

On Tuesday came news that annual UK inflation had registered its first zero reading in 55 years, putting Britain on the cusp of deflation. Expectations are that inflation will turn negative in March, when the cut in gas prices by British Gas (the utility company with the biggest market share) shows up in the figures. The fall was driven by declines across a range of prices, including transport, food, furniture and computer equipment.

The consensus view, certainly shared by Bank of England (BoE) governor Mark Carney, is that a short period of deflation will be a good thing for the UK economy, giving a boost to household incomes and supporting the recovery. Strong retail sales figures released last week certainly helped dispel fears that the UK is on the brink of a deflationary spiral.

Around 40 countries are currently experiencing deflation, and falling inflation is a global phenomenon – Worldwide Consumer Price Index inflation stands at 1.2%, having fallen 1.8% in the last two years. Although inflation is expected to remain around zero, or slightly negative, for the rest of the year, as the temporary effects of falling oil prices diminish, a slow return to the 2% target over a couple of years looks likely. However, the BoE will need to remain watchful, as the financial crisis, and the policy tools used in response, have altered normal economic relationships. After all, when interest rates were first cut to 0.5% six years ago, financial markets were anticipating a first rate rise by the end of that year.


With just four working days left until the end of the tax year, and seven days until the introduction of the new pension freedoms, there is much for savers and investors to consider to make the most of the tax-planning opportunities available.

Those looking to make last-minute use of their annual ISA allowance by saving into a Cash ISA look set for disappointment, as figures confirmed the traditional spike in interest rates before the end of the tax year has failed to materialise, and that rates have fallen to an all-time low. The inability of banks and building societies to compete with the rates offered by the government-backed pensioner bonds has been cited as the main reason for the fall. The introduction of the new personal savings allowance next year strengthens the case for investing this valuable allowance in a Stocks & Shares ISA capable of generating long-term tax-efficient income and capital growth.

This week is also the last opportunity to maximise pension contributions in this tax year and make use of annual gifting allowances to help reduce an Inheritance Tax liability. There is still time to act to ensure you minimise your tax bill and make the most of your investment opportunities.

Aberdeen Asset Management is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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