Equity markets, last week, continued to trade in a tight range. The indexes that performed the best over the past five days were those who have seen intensified speculation of additional monetary stimulation. The FTSE 100 rose just under 1%, boosted by another fall in inflation, increasing hopes the Bank of England will be in no rush to raise interest rates. The Euorfirst 300 rallied nearly 2% on the week, ahead of Monday’s eurozone inflation data and Thursday’s monthly ECB rate announcement followed by the press conference. The Nikkei 225 index had a good week up over 3%, as speculation grew that the Bank of Japan could introduce new policies to stimulate the economy, after a lacklustre start to 2014.
In contrast, as the Federal Reserve continues to wind down its bond purchase program, and Fed Chair Janet Yellen, in the previous weeks press conference, gave investors some idea when she expects the first interest rate rise. The S&P 500 fell 0.5% on the week.
We wrote during the week how inflation data around the world remains below most central banks target levels. This will allow interest rates to remain lower for longer, and in some economies, Japan being the most obvious example, additional stimulation could be introduced. In turn this could lead to emerging markets starting to attract investment capital again. Some signs this week came as the MSCI emerging market index rose over 2%, breaking what technical analysts describe as a 6-month downtrend. Further evidence of an improvement in sentiment came as Russian equities rose on the week, the ruble rallied and Russian 10-year bond yields fell modestly.
The coming week will be dominated by two regions, the eurozone and Japan, as we will get further clues as to the state of their economies and the likelihood of further monetary policy initiatives. As we discussed the focus for the eurozone will be Thursday’s ECB meeting. Ahead of that meeting we get inflation data tomorrow, and manufacturing data on Tuesday. In Japan we get the release of the Takan survey; the quarterly economic release is one of the most important surveys of Japan. It provides a measure of general business economic and trade activity. A downbeat report will once again raise expectations the Bank of Japan will introduce further monetary stimulus.
Last week’s AAII investor survey continues to show investor expectations for equities to remain in a tight trading range in the coming months. Bullish sentiment once again fell, which is often an encouraging sign for investors. Our personal view, assuming we get no unexpected rise in tensions in the Ukraine, or unexpected moves by central banks is for equities to continue to mark time until the start of the earnings season is kicked off by Alcoa a week on Tuesday.
As we have pointed out before, equities have rerated a lot in the past year and for the impetus to be maintained, corporate earnings will need to start to show forward momentum.