MONTHLY MARKET INSIGHT

MARCH 2014 KEY TOPICS TO WATCH (MAR)

Markit PMI Manufacturing (Feb) (3rd) Eurozone Q4 GDP Final (5th) BoE / ECB Interest Rate Decision (6th) US Non Farm Payrolls (7th) Eurozone CPI (17th) UK Unemployment Rate (18th) FOMC Monetary Policy Statement (19th) UK Q4 GDP Final (26th) US Q4 GDP Final (27th)

U.S. FUNDAMENTAL OVERVIEW

With Janet Yellen now firmly established into her role as Federal Reserve Chairwoman, conjecture regarding changes to the pace of asset purchases is to be widely expected. Both February and January heralded no change to the $75billion rate owing to mixed economic data which was attributable in part to the adverse weather conditions in December/January. This excuse is not applicable for all data sources however, as some are mixed due to high levels of QE correlation (e.g. US Real Estate indicators). It is likely that as February data has been more positive, the rate of tapering may be increased to maintain a proactive stance on monetary policy, but only by an incremental step of no more than $10billion. This is because the key metrics of CPI (1.6%) and unemployment (175k / 6.9%) figures are still notably below Federal Reserve benchmarks of 2.0% and 200k / 6.5% respectively. It is also clear that Federal Reserve speakers are urging caution regarding any decision, yet there has been increased talk of interest rate hikes starting in 2015 based on increased tapering. The rebound in US equity performance in February can largely be attributed to a strong Q4 Earnings Season, which once again was heavily discounted in terms of analysts projections. However, many companies and sectors have exceeded their own low estimates and have produced positive EPS guidance for the next year, which has created a P/E ratio of 15.4 that is above pre-crisis levels. The Q4 Earnings Season is a bullish catalyst for the equity markets that may not be realised as intended as a result of continued global demand issues and the deflationary pressure of tapering. The political nature of events in Ukraine may influence intraday movements and increase volatility of US equities but will not dramatically influence market direction unless the Crimean crisis has escalated to include a realistic threat of war. From a macroeconomic standpoint, US GDP looks increasingly positive at 3.2% despite numerous revisions and mixed industrial data. This has caused the IMF (alongside an Improved European outlook) to revise global growth figures to 3.7% up 0.1% from previous projections. Marchs final US GDP figures for Q4 will be important in order to confirm the progress and recovery of the US economy.

S&P 500 (FEB 2014)

1,880.00 1,860.00
1,840.00

1,820.00 1,800.00 1,780.00 1,760.00 1,740.00 1,720.00 1,700.00

1,680.00

Feb 04

Feb 06

Feb 10

Feb 12

Feb 14

Feb 18

Feb 20

Feb 24

Feb 26

FTSE 100 (FEB 2014)

6,900.00 6,800.00 6,700.00 6,600.00 6,500.00 6,400.00 6,300.00 6,200.00

Feb 28

Feb 03

Feb 05

Feb 07

Feb 11

Feb 13

Feb 17

Feb 19

Feb 21

Feb 25

Feb 27

EUROPEAN FUNDAMENTAL OVERVIEW

Feb 04 Feb 06 Feb 10 Feb 12 Feb 14 Feb 18 Feb 20 Feb 24 Feb 26 Feb 28
Feb 03 Feb 05 Feb 07 Feb 11 Feb 13 Feb 17 Feb 19 Feb 21 Feb 25 Feb 27

DAX 30 (FEB 2014)

9,800.00 9,700.00
9,600.00

9,500.00 9,400.00 9,300.00 9,200.00 9,100.00

9,000.00

The most prominent news event in the Eurozone towards the end of February was escalation and development of the Crimean crisis. This has increased the volatility of European focused indices in an unpredictable manner due to the unscheduled and political nature of the conflict. This would suggest that European assets would be sold due to the extra risk; however, at present the effects are largely political rather than economic with potential Eurozone natural resource shortages being over exaggerated and Russian trade embargo speculation being used mainly as a negotiating and political tool. There is a potential for increased conflict in future months but this is not realistically seen as a favourable option by either the US or Russia. The Eurozone states have so far been cautious owing to the geographical proximity and invested interests with all of the countries involved. In terms of economic data, the Eurozone has had a very strong month especially when viewed in comparison to Emerging Economies which continued to be negative in February, with particular emphasis on poor Chinese production and liquidity data, hinting at fragile global growth. This has provided a stimulus for developed economy equities in February with Eurozone equities supporting rises through significantly improved industrial indicators such as PMI (now showing as strongly above the 50 contraction point) and inflationary pressures finally becoming apparent with a small rise in CPI. This has helped propel the Euro to new recent highs, especially compared to a relatively weak Dollar. Whether the positive data is sustainable with continued high unemployment and poor credit conditions (and a strong Euro to hurt exports) is debatable given past performance. Data from the UK has continued to be positive (if a little tempered from the middle of last year and credit heavy) the longevity of this recovery has led to increased talks of interest rate hikes, this is seen as the next step of recovery before QE reductions. This is reliant on further unemployment rate improvement with the current figure of 7.1% nearing BoE thresholds for further monetary action. This article does not constitute as investment advice.

8,900.00 8,800.00

Feb 04

Feb 06

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Feb 26

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