The UK Elections have added a bit of colour to markets. Not that investors are fans, because elections invariably bring uncertainty – and markets hate uncertainty. Case in point the fun and games that preceded and have followed the election of the Syriza government in Greece. Defying the bookies, the UK electorate did not deliver a hung parliament, providing markets with a Friday boost as a Conservative Party majority means no horse-trading in coalition talks and the Tories are generally considered more market-friendly.

Markets opened on Friday morning with UK equities, gilts and sterling back on the rise. Although markets didn’t display a huge level of concern about possible outcomes ahead of the election, there was still an element of ‘drift’ evident prior to the outcome. A healthier US jobs report on Friday also bolstered confidence.
As a result of the Friday bounce, most equity markets have erased the losses from earlier in the week. Federal Reserve chief Janet Yellen had noted that share prices are ‘quite high’ and warned about ‘potential dangers’. She did state that overall risks in the financial sector as ‘not elevated’ though. Markets took note and share prices softened.

With eurozone bond yields trading at particularly low levels in the middle part of April, a snap back to higher rates is probably not that surprising, but the move was remarkable. Still, Irish borrowing costs, as measured by its 10-year bond virtually doubled since 16 April to 1.2% on Friday, while German 10-year yields hit 0.78% at one point last week. Just a couple of weeks ago, German bunds were yielding 0.07%. These are still pretty low levels in historical terms though. Greece remains a significant factor in intermittent market skittishness and the Greek government has a €750 million payment due to the International Monetary Fund on Tuesday 12th of May.

Equity Markets

• Following an incredible run of fourteen positive month’s in-a-row, European equity markets fell in April, much of the damage was caused by euro currency strength. Markets were, however, adversely affected in the last week of the month by bond market weakness as well as some profit-taking.

• World equities fell by 1.6% in April but have given a total return of a strong 13.4% during the first four months of 2015. There was a mixed bag of returns for the major markets in local currency terms during the period ranging from minus 1.7% in Europe to plus 13.0% in Hong Kong. The massive move in Hong Kong was due partly to the opening up of the market to mainland Chinese investors. Chinese shares with dual-quotes have traded at a significant discount in Hong Kong verses the mainland stock markets

Bonds & Interest Rates

• The Merrill Lynch Euro over 5 Year Index fell by 2.2% in April, giving a total return of 4.5% in the first four months of 2015. Bond prices in general fell back due to profit-taking as well as concerns over slightly stronger eurozone economic data.

• The German 10-year bond yield rose in April from an all-time-low of 0.18% to 0.37%. Equivalent US rates rose from 1.92% to 2.03%. The gap between the German and the US 10-year yield remains close to its highest level since German re-unification. Ireland tested the waters regardless, selling €750 million worth of 7-year bonds at a yield of 0.81%. Already fully funded for this year, Ireland has raised over €10 billion of the €12-15 billion it requires for 2016.

• The Federal Reserve is now expected to keep interest rates at record low levels until December 2015, with a small chance of a rate rise in September. The Bank of England is not expected to move until closer to year-end or early 2016.

Commodities & Currencies

• Commodity prices overall were up by 5.4% in April, led by a sharp rise in over-sold oil prices, and have now regained all of the losses earlier in the year. Oil rose by well over 20% due to short-covering by hedge funds. Oil prices maintained their recent recovery with Brent crude coming close to $70 per barrel before easing back.

• The gold price was virtually flat on the month, ending at $1,182 per troy ounce.

• The euro currency strengthened against most of the major currencies following a long period of weakness. The €/$ rate moved from 1.07 to 1.12 over the month.

Market May 15