A good week for equities saw the best performance of the developed markets come from the FTSE 100, as it rose just over 2%, boosted by Pfizer's bid for AstraZeneca. The S&P 500 rose just over 1% as did the Eurofirst 300, the Nikkei remains in the doldrums but managed to finish the week just in the blue. US equities and US treasuries seem to have a different view on life at present. Friday's US jobs data showing a larger than expected jump in job creation boosted equities and bonds, as 10-year US treasury yields fell below 2.6%. This reaction was not the one most of us who have been following markets for many years would have expected. A better than anticipated jobs report should normally lead to a fall in equities and a fall in bond prices, leading to rise in yields.
A tighter labour market is a sign of a strengthening economy and, as markets are supposed to be forward-looking, speculation should be that an interest rate rise is closer, putting pressure on equities. A tighter labour market indicates the likelihood of wage pressure, leading to inflation pressures, and that should lead to a fall in treasuries resulting in a rise in yields. The recent flattening of the yield curve, despite the improving economic data may be a sign that bond investors are more concerned about the developments in the Ukraine than equity investors. Frank Investments would expect that at some stage the recent trend of rising bond and equity prices cannot be maintained and will be reversed in at least one or the other of the asset classes. The troubles in the Ukraine has not led to a material rise in gas or oil prices yet but if the troubles do continue that must be a possibility. Russian treasury yields have stabilised over the past week or so and the 10-year yield currently remains at 9.5%. The Vix fell on the week to close below 13; on most occasions over the past year a fall to this level has prompted a modest short-term correction in equities.
The main event of the week will be the meeting on Thursday of the European Central Bank. Economists remain convinced that the ECB will leave rates where they are for at least another month, allowing Mario Draghi once again to look uncomfortable in his chair as he answers questions from the press. These questions are typically about the circumstances under which he will look to use his talked about measures to improve the eurozone inflation outlook. The euro has hardly moved all week, remaining close to $1.39, the level it has held against the US dollar for some time. Frank Investments cannot see what is to be gained by waiting another month before acting as some economists anticipate, it may be now or never for the ECB to move!