Transport

The FTSE 100 took a bit of a battering on Tuesday, a combination of Vodafone warning investors that greater investment will be needed in its network, impacting earnings in the short term and hence the share price, and UK inflation coming in at 1.8%, fractionally higher than expectations. The UK inflation data will reopen the debate about when the UK will see its first interest rate rise. UK gilts barely reacted to the news, the 10-year yield rising modestly to 2.6%.

With the recent moves in US treasuries and European peripheral bonds it is worth noting that US treasuries were little moved as US 10-year yield remains close to 2.5%. Peripheral bonds that have become part of the recent move to de-risk has now seen 10-year Italian bond yields rise to 3.16%. 

One measure that often attracts attention when investors are looking for signs of an economic slowdown is the Dow Jones Transportation index. This index is considered a measure designed to gauge the strength of the American transportation sector. Purchased goods need to be transported, the less demand for goods the less demand for transport. Weakness in the transport index can sometimes be a lead indicator to the broader indices; at present the Dow transport index is showing no signs of weakness. As one can see from the chart, the S&P 500 appears currently to be lagging the Transport index. 

Source: Yahoo Finance

The recent weakness in the Russell 2000 index of US smaller companies and the FTSE 250 index in the UK has, as we pointed out at the start of the week, been considered by some as a lead indicator for what might happen in broader markets. The S&P 500 and the Russell 2000 have risen in tandem over the past few years and there has been a distinct divergence in recent performance. Merrill Lynch in a recent report addresses this recent weakness, and point to their US activity surprise index beginning to turn up recently — they see this as a good sign for the small cap sector in the longer term. 

Despite the volatility in some of the more economically exposed indexes, the Vix remains remarkably subdued, currently trading 12.5 points. It is always hard to decide if this is a good sign or a bad one. On the one hand it can show investor confidence, others consider it a sign of complacency. As we have pointed out before, equity markets have tended to correct when the Vix has fallen to these levels in the past.

Posted on May 21, 2014 .