Europe once again seems to be dominating the headlines, the week past was all about the European elections, the week ahead is all about what the ECB announce on Thursday at the monthly interest rate decision meeting. The implications for last week’s vote continue to use up lots of editors ink. Despite the muted reaction from equity and bond markets, what most commentators seem to agree is that the vote highlighted the continued tensions between France and Germany, as the two economies perform in very different ways inside the euro.
Last week saw the US equity markets continue to perform strongly, the S&P 500 rising nearly 1.5%. The Nasdaq index, which has been the victim of some recent profit taking, rose nearly 2%. The performance of US treasuries and the gold price were the other stories of the past few days that dominated market commentary, as the 10-year US treasury yield fell to 2.44%. The fall in real US yields did not attract buyers of gold as the price dropped to $1250 an ounce, the fall maybe attributable to the recent rise in US dollar. The fall in treasury yields has been credited to many different theories. The weak US GDP report last Thursday, providing increased concerns on the recovery in the US economy. Another suggestion is month-end buying by fund managers to align their portfolios with underlying indexes. We still believe the fall in US treasury yields is in reaction to the falling peripheral bond yields. UK 10-year gilt yields closed the week at 2.55%. One thing is for sure, the move in bond markets this year has caught many off guard.
When we look at how sentiment changed over the week, the Vix, or fear gauge as its often called, fell to close the week at 11.3, a level that it has only seen once before in the past 5 years. The AAII sentiment index saw bullish sentiment rise to 36.5, but remains below the long-term average of 39.5. Last week saw the first out flows of money from European equities after 48 consecutive weeks of in flows, equity markets overall saw very small inflows. Surprisingly, bonds have seen twice as much inflow compared to equities this year, $92bn against $47bn for equities, according to Merrill Lynch.
In this blog on more than one occasion we expressed the view that as the Federal Reserve tapered its monetary policies, the ECB would start its own. The week ahead will be dominated by what the ECB announces on Thursday. The Sunday Times leads with the headlines that Mario Draghi is set to inject billions into Europe’s economy. Negative interest rates that will penalize banks for holding cash, buying loans from banks, as well as subsidizing loans for small companies through a similar scheme to George Osborne’s Funding for Lending, are some of the measures being speculated. A lot is expected from Super Mario on Thursday. As always the market reaction will be the one verdict that will be the most important. Ahead of Thursday there is a raft of economic data in Europe, including inflation, employment and purchasing managers surveys.
After the weaker than expected US GDP number, Monday’s US PMI data will probably grab a few headlines. In the UK we also get a series of manufacturing and mortgage lending data to analyze. On Thursday before the ECB announcement, the Bank of England announces its rate decision. Despite some speculation that the Bank of England may be a tad closer to raising rates than they were, any change on Thursday would take the market by surprise.