First Quarter 2014: A Winter Chill on Global Markets
World equity markets cooled off in the first quarter of 2014 as severe winter weather slowed US economic activity and tension in the Ukrainian region of Crimea elevated concerns internationally. Even so, world equity markets finished marginally higher over the first three months of the year. Unusually strong winter weather dampened manufacturing, construction, and real estate sales in several regions across the US. The effects were largely seen as transitory as manufacturing increased more quickly in March than the previous two months and job growth in February was stronger than forecast. Optimism in commercial and residential real estate helped returns, with real estate indices posting the strongest returns among major asset classes.
The Federal Reserve, now under Janet Yellen’s leadership, slightly adjusted its forward guidance policy by dropping the unemployment rate threshold in favor of more broad labor market measures, inflation pressures, and financial developments. The shift in policy was minor and the Fed continued to systematically reduce the size of its large-scale monthly asset purchases. Market participants were slightly surprised by Fed projections that suggested the Federal Funds rate could be raised as early as 2015. Yields for two-year Treasurys rose to their highest levels since 2011 on the news. Over the course of the quarter, however, interest rates declined, pushing most fixed income indices higher. Improving demand for loans in the corporate sector and easing credit conditions indicated prospects for future growth.
Emerging markets continued their run in the red, before rebounding in the last two weeks of the quarter, as worries over a Chinese slowdown and conflict in Ukraine raised worries about near-term growth prospects. Chinese corporate credit markets proved problematic for the emerging giant. Lending to Chinese corporations slowed materially and several companies scrapped their planned bond offerings because of lack of demand from the market. Protests in Kiev following the abandonment of an agreement for closer trade ties with European Union in favor of increased cooperation with Russia led to the ouster of Ukrainian President Yanukovych in February, and Russia’s annexation of Crimea just weeks later. The possibility of international conflict and trade restrictions between the EU and Russia has investors worried that already anemic growth in the Eurozone might slow further.