Equity markets recovered well last week after central banks of the US and UK reiterated their views that the recovery is not yet strong enough, despite approaching their unemployment targets, to raise interest rates in the near future. The S&P 500 is once again within a whisker of its all time high, reached last month, after a rise of over 2% on the week. The FTSE 100 also had a better week rising 1.4%. Janet Yellen’s comments helped US equities but they had the opposite effect on the US dollar and longer-dated yields; the yield on the 10-year US treasury rose 6bps over the week. Emerging market equities that have seen a lot of outflows over the past year had a better week, the MSCI EM stock index is now up 3.3% from its recent lows. The Vix having hit 21 at the start of February, is back to 13.5 points.
The price of gold rose over 4% on the week, now trading back over $1300, the gold price is now up 9% on the year. The gold price, has been for a while a proxy for the 10-year US treasury yield, the fact that the gold price continued to rise this week despite falling bond prices has taken some investors by surprise. It will be interesting to see if the correlation will re-establish itself, either by yields falling back or the gold price giving up some of those gains. Commodity markets had another good week, the Reuters commodity index rising just over 1%, the index is up nearly 5% on the year.
As we come close to the end of the earnings season, particularly in the US, the consensus view is that the season has been no worse than previous quarters. According to Zach's research, this season has been better for positive surprises and earnings growth, but what does remain consistent with previous quarters is the cautious outlook statements from CEOs that accompany the earnings reports. There were a couple of shockers this week, particularly in the UK from Rolls Royce and Tate and Lyle.
On Friday, the eurozone announced better than expected GDP data, the economy grew at 0.3% against an estimate of 0.2%. The better number was as a result of slightly better GDP data from both Germany and France. I would personally suggest this result was the worst of both worlds. If you extrapolate the first quarter's growth over the year that would suggest the eurozone economy will grow just over 1% in 2014. A weaker number could have given the ECB the ammunition to push for more a more proactive monetary policy number. As it is, this report confirms growth in the eurozone remains substantially below that of the US and UK and Mario Draghi will be left with having to maintain his stance at the next ECB meeting.
Looking at the week ahead, we get plenty of economic data to give more insights on the strength of the global economy. On Monday, China reports loan growth data, which some will look to for continuing signs as to the strength of the Chinese economy. On Tuesday in the UK, we get inflation data with several of the Sunday papers reporting that UK inflation could fall below the target rate of 2%, despite rises in energy costs, the continued strength of the pound and weaker food prices given as the reason. It continues to baffle many experienced investors how the policies of central banks is still not feeding into higher inflation data. Also on Tuesday, we get the German ZEW economic sentiment index. On Wednesday, we get US producer prices, and in the UK, employment data. On Thursday, the focus will be on the euro area Markitt flash PMI manufacturing data, euro area consumer confidence and in the US core inflation. Finally, on Friday, the headlines here will be made from the UK retail sales report. In addition to the economic news, there are some large companies reporting earnings this week with BHP Billiton and Coca-Cola on Tuesday, then BAE Systems, Centrica, Hewlett-Packard and Wal-Mart on Thursday.