The past couple of weeks have been busy to say the least.
Greece has struck a short-term deal to prevent it defaulting on its debt, the FTSE 100 index reached a record high, and the US gave the market an update on the direction of its monetary policy.
The latest Greece deal is by no means perfect but at least it staves off fears of a default and potential exit from the eurozone in the short term.
Greece has secured an extension of the existing bailout package but the Greek government has had to make a U-turn on many of its electoral promises in order to reach a compromise. The bailout money will continue as will Greek bank support from the European Central Bank, but the ‘can has only been kicked down the road’ until June.
Negotiations over a third bailout package will then have to start and these will not be easy; not least because of the damage done in this round of negotiations that have seen considerable brinkmanship and clear animosity between the Greek and German finance ministers.
In the short term, political risks within Greece remain high and the next few months will be difficult.
A new three-year programme, which is a long way from being agreed, will likely need to be €60-80bn (£43.6bn-£58.2bn) and would come with some very tough conditions attached.
Elsewhere, the US Federal Reserve chairwoman Janet Yellen recently made her semi-annual testimony to the US Senate. The reaction of markets – equities up and bond yields down – suggested her comments were dovish and low interest rates would continue for some time.
The Fed remains data dependent; it is watching wage growth and inflation data closely. We think a rate rise could come as soon as June but if US economic data slows and inflation remains extremely low, this rise may get pushed into the autumn or beyond.
Once investors realise rate rises are coming, we may well see a rotation in some asset classes, with fixed income most vulnerable in this respect.
Closer to home, the FTSE 100 has recently reached new highs, finally breaking through the previous record close and intraday high levels set back in December 1999.
The strength of the FTSE reflects hopes for a pick up in earnings driven by an improvement in Europe.
It is clear the FTSE today is not as overvalued as it was in 1999, with it currently on 15.3x the next 12-months’ earnings. This suggests there is certainly scope for it to move higher.
It is worth noting, however, the FTSE continues to lag other developed market indices, hindered at times over the past few years by the dominance of financials and then resources/commodities firms.
Also, the FTSE 100 does not represent the UK economy. Only 23 per cent of FTSE revenues come from the UK, while 27 per cent of revenues are from Europe, 24 per cent from North America, 15 per cent from emerging markets and 11 per cent from the rest of the world.
