EKIP– Expert Club for Economics and Politics A Different Opinion
- Global markets continue to grow, but at a slower pace than in January
- The average yield of universal pension funds in our country is slightly decreasing
- SOXIF underperforms global markets in the first two months of 2019
- Gold price falls at the end of February
February, like January, was a pretty good month for financial markets. The largest U.S. market index, the S&P500, rose by just under 3.2% for the month, while Germany’s DAX also rose by roughly 3%. This marked a significant slowdown from the sharp gains of around 8% for the S&P500 and 6% for the DAX in the previous month, but was still an expected development, given that the January gains were a rebound from the sharp correction seen in December. Meanwhile, yields on short-term U.S. government bonds remained stable, but those on long-term bonds deteriorated and even entered negative territory. However, yields on German government bonds fell, leading to an increase in their prices.
Regarding universal pension funds, their average yield decreased to 0.76% in February, from 1.1% in January, in line with the weaker growth of financial markets in general. What is specifically relevant for Bulgarian pension funds is the fact that our native stock exchange has performed far more disappointingly than global markets at the beginning of this year. While in January and February the US indices practically completely erased the losses generated in the last quarter of 2018, the SOFIX index stagnated. In January it even fell, but this was followed by a recovery in February, which brought it back to its starting position compared to the end of December. This is probably at least partly due to the deteriorated performance of the industrial sector in the latest NSI statistics, as well as retail trade.
Looking at Harry Brown's "Permanent Portfolio" you may have noticed (those of you registered for the Virtual Pension Fund) that its returns weakened significantly in February. This was due to lower growth in US stocks, a decline in long-term government securities and, last but not least, a decline in the price of gold. There was a slight decline in the price of gold in February after the price of the metal had been rising rapidly for two months. This decline came in the last days of the month. It is difficult to say exactly what caused this downward correction in the price. Last but not least, after several consecutive months of decline, the price of Bitcoin not only stabilized, but also recorded a growth of 8.93% in February. This growth is far from enough to erase the losses of the previous few months, but it seems to be an indication that the decline in the price of the cryptocurrency has most likely reached a temporary bottom.
If we look specifically at the macro picture in the US (which often has a significant impact on the price of gold), several news from the end of the month can be cited as factors that are positive for the US economy and the dollar and, accordingly, lead to a decrease in interest in gold. First of all, the risk of a serious trade war between the US and China seems to have subsided after Trump postponed the imposition of higher tariffs and the two sides seem to have already reached some initial agreement. In addition, new data on US GDP growth in the last quarter of 2018 exceeded analysts' expectations.
On the other hand, the Federal Reserve Chairman, in a speech to Congress, corrected some of the hints made in January that the central bank might be "softer" in its monetary policy this year and accordingly not raise interest rates as much. In his latest statement, he again took a firmer tone, saying that the Fed's monetary policy objectives remain unchanged for the time being. Any indication of a tighter monetary policy means lower inflation expectations and, accordingly, leads to a decline in interest in gold (as a hedge against inflation.
This month, Powell's remarks will once again be of particular importance, specifically in the context of the monthly meeting of the Fed board. Usually, it is during the March meeting that the US central bank carries out the first increase in interest rates of the year, if it intends to raise them four times (once every quarter). That is, from the actions and statements of the Fed board at this month's meeting, we will get a clearer idea of what to expect in terms of monetary policy (and, accordingly, as a reaction of the markets) for the rest of the year.
If you don't know yet, but would like to find out what kind of return your savings could achieve if they weren't being poured into the empty vat of the Pension Fund every month, you can register for our Virtual Pension Fund here . A detailed description of the idea and functioning of this experiment of ours can be found here.
