A poor week for equity markets, particularly those in Europe, where U.S. big cap investors once again faired better than most. UK equities continue to be impacted by concerns on how the strength of sterling will influence the upcoming earnings season, along with interest rate expectations. In the U.S., the S&P 500 may have held up better than most other developed indexes in the past week, but the same cannot be said for the Russell 2000 index of smaller capitalized U.S stocks, which fell nearly 4%.
In the past five days, investors focused on both the Federal Reserve’s minutes that confirmed that it expects to wind up the bond purchase program in October, as well as slightly disappointing Chinese import export data. Japan added to the disappointing economic reports as month-on-month machinery orders came in well below expectations.
The other story of the past week was the events in Portugal, and in particular Banco Espirito Santo, as it reminded us that the problems in the eurozone might not be entirely behind us. The Portuguese concerns also refocused investor minds on the upcoming results of the ECB bank's stress tests in the autumn. In our view, any increase in tensions within the eurozone will just push the ECB closer to more proactive monetary policies, which should help underpin risk assets.
We always take the opportunity in this note to review any change in investor sentiment in the past week. The weekly AAII investor survey reported an increase in bearish sentiment, the Vix rose on the week from just over 11 points to close the week at 12, but below the 13 it rose to on Thursday. All asset classes saw weekly inflows: equities $5.5bn; bonds $3.6bn; and commodities $1bn. The “safe haven” bonds of the U.S. along with the UK and German bunds all saw yields fall on the week. Portuguese government bonds did see some selling as yields rose, but the 10-year yield at 3.87% remains materially below where it was a year or so ago. Likewise, Spanish and Italian yields rose, but only modestly.
The coming weeks will see a step up in the earnings season as in the U.S. the banks kick off with Citi on Monday. Expectations for the banks are not high as trading profits are expected to be weak as the low volatile environment has made opportunities rare. Banks are still paying fines to settle outstanding issues related to the 2007-2009 banking crisis, which may also have some impact.
On the economic front in Europe, industrial production on Monday and inflation data on Thursday will probably draw the most headlines. The U.S. sees the continual weekly flow of economic data from housing to consumer confidence and on Wednesday industrial production. On Wednesday we also get China’s quarter-on-quarter and year-on-year GDP growth rates. The m-o-m rate is expected to improve to 1.8% from the 1.4% in the previous quarter; the y-o-y rate is expected to come in at 7.4%.