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Solid start

17 April 2015

Quantitative easing in the eurozone boosted markets in the first quarter, reports Chief Investment Officer Chris Ralph.

Global markets were in more positive mood in the first quarter of 2015, helped by quantitative easing in the eurozone and improved lending conditions in China. The MSCI World Index rose 7.5% and the FTSE 100 Index broke through the 7,000 barrier for the first time.

Global political and economic tensions have not entirely gone away, however. A tenuous ceasefire between the Ukrainian government and Russian-backed rebels has been fraying at the edges. The Sunni-Shia civil conflict in Yemen is becoming a proxy war between Saudi Arabia and Iran. In Greece, the election victory of the anti-austerity party, Syriza, again raised the possibility of a Greek exit from the euro.

The price of oil recovered somewhat from its January lows, heading back towards $60 a barrel. Gold traded between $1,300 and $1,150 an ounce, ending the quarter at around $1,200. The US dollar flexed its muscles, particularly against the euro, which fell – precipitously, in currency market terms – from $1.20 to $1.07 during the quarter.

US equity performance was subject to mixed sentiments, with currency fears tempered by a surge in mergers and acquisitions, which hit a 15-year high. The S&P 500 Index rose by 5.9%.

US consumer sentiment rose in March, almost back to January’s seven-and-a-half year high, and markets benefited from dovish comments by Federal Reserve chairman Janet Yellen. Investors interpreted these to mean that a June rise in interest rates was less likely. However, there was an end-of-quarter sell-off on fears that the strong dollar would result in a disappointing first-quarter corporate reporting season.

Rising sun

The Japanese stock market was the outstanding performer of the quarter, with the Nikkei 225 rising by 14.8%. That was in spite of mixed economic data, including one inflation measure which showed inflation for the year to February at 0%. The governor of the Bank of Japan would not rule out a temporary return to deflation, and so the expectation that the central bank would ease monetary policy further was the main driver of the equity market's rise. However, month-on-month industrial production fell by more than expected and there was a slight rise in unemployment.

As growth continued to slow in China, the authorities cut interest rates and made it easier for banks to lend. This prompted a strong rally in stocks on the mainland and in Hong Kong, and helped the FTSE Asia Pacific Index end the quarter 12.3% ahead. Equity gains were also registered in the Philippines, which had better-than-expected fourth-quarter GDP growth, as well as in Thailand and Indonesia. In emerging Europe, Russian stocks benefited from a stabilising oil price and renewed hopes of a settlement with Ukraine.

Bank boost

European equities, particularly those in the eurozone, enjoyed a strong quarter, with the EURO STOXX 50 Index rising by 9.9%. The market was boosted by the launch of the European Central Bank’s long-awaited €1.1 trillion quantitative easing programme. This number was even bigger than the market had anticipated, and sent the euro lower against the dollar. This prompted the Swiss National Bank to abandon unexpectedly the Swiss franc’s peg to the euro, which in turn set off a wave of volatility in the Swiss stock market.

European growth remains muted, with quarter-on-quarter growth of 0.3% for the fourth quarter of 2014, a modest improvement on the previous quarter’s 0.2%. Annualised inflation improved from -0.6% in January to -0.3% in February and -0.1% in March.

This was a volatile quarter for UK equities, as investors tried to guess when the Federal Reserve would raise interest rates. While the year started with a number of earnings downgrades, the results season generally met or bettered expectations. The share prices of the big resource companies stabilised along with the prices of oil and base metals. Mergers and acquisitions activity was strong, notably in the healthcare sector, and helped to nudge the FTSE All-Share Index up by 4.7%.

On 20 March the FTSE 100 Index breached the psychologically important 7,000 level for the first time. It was helped partly by relief that Greece had promised to implement the reform measures needed to secure bail-out funds from the European Union. Investors were also relieved that the next US rate hike seemed further away than they had feared.

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