Most developed equity markets finished the week pretty much where they started them; the one exception was the Nikkei 225 index down nearly 2%. 10-year US treasury yields ended the week fractionally off its low at 2.62%, but remain close to the bottom end of its recent trading range. UK 10-year gilt yields, which have tracked US treasuries in the past year, closed on Friday at 2.68%. The Vix also fell to the bottom end of its trading range, just below 13.
The week was dominated by the ECB meeting on Thursday. Once again Mario Draghi’s words seem to do the trick as currency markets took his post rate announcement comments to signal a rate cut in June. The euro, which had approached $1.4 ahead of the meeting, closed Friday at $1.3750.
Commodities are now the best performing asset class this year up 4.2%, modestly out performing global bonds up 4.1%. Overall assets across the board continue to trade in relatively tight ranges. For example, the euro-dollar has traded between 1.30-1.40 for the past 10 months, the gold price within $1200-1400 for the past 12 months, and 10-year US treasury yields between 2.5% and 3% for the past 11 months.
The week ahead in the US will be dominated by the economic releases on Thursday, jobless claims, inflation and industrial production will give economists plenty to pour over in assessing the current state of the US economy. There is a constant release of macro data from the Chinese authorities during the week, industrial production on Tuesday, and on Thursday the May flash manufacturing Purchasing Managers Surveys will be the main events.
In the UK, according to the Sunday Times, Wednesday’s inflation report from the Bank of England will be accompanied by another increase in growth forecasts. Growth for 2014 could be increased to 3.5%, from 3.4%. The speculation is that the latest increase in growth expectations will lead to Mark Carney signalling to the market the first UK rate rise will now be in q1 2015.
So far, selling in May will not have been a good strategy, and investor sentiment remains cautious. The AAII weekly survey continues to show bullish sentiment well below historic levels. According to Merrill Lynch’s fund manager survey, fund managers continue to hold supportive levels of cash in their portfolios. Most of the other sentiment indicators they produce continue to show investor sentiment either neutral or bullish for stocks. One word of caution, the Vix trading below 13 has led at times over the past year to a modest correction in equity markets.