Another solid week for equities in Europe, slightly less so for those in the US as the S&P 500 finished the week down, if only by a marginal amount. Global equities are now up just under 4% year to date in US dollar terms. Mario Draghi and Janet Yellen were both in the news this week; Janet Yellen as she presented her 2-day testimonial to the senate and Mario Draghi appeared in front of the European Parliament. The latest rally left the Stoxx 600 index and the FTSE 100 very close to the highs of 2007. For the FTSE 100 the question will be once again whether it can finally break and hold the 7000 barrier after 15 years of trying.
Risk assets saw big inflows during the week as emerging market debt and equity markets attracted capital as did high yield bond funds, amounting to the largest inflows into these asset classes for the past 2 years. European equities continued to attract inflows as another $5.5bn went in to stocks. Inflows over the past 8 weeks have been the heaviest since December 2008 according to Merrill Lynch. We have often described this equity rally, as the most unloved in history, perhaps there are signs of some love returning.
Further signs of an improvement in sentiment as the Vix fell on the week, as it has done for the most of February. The Vix closed on Friday just above 13, having started the month at 22. Investor sentiment, according to the AAII investor survey, also remains optimistic as bulls out vote bears by more than 2 to 1. Some technical analysts report that current relative strength indicators suggest equities in Europe are now looking overbought post the recent rally.
This time last week there were several events that had the potential to unnerve investors. Greece, Ukraine the ongoing earnings season as well as central bank speeches, but these all passed without causing too many ripples.
Looking to the week ahead, after HSBC’s Chinese manufacturing PMI estimate beat expectations during the week, the official figures from the National Bank of Statistics on Sunday also reported better than expected PMI data for manufacturing and services. It is a relatively quiet in the US for macro data with the exception of Monday when the Institute for Supply Management report their estimate of the state of US manufacturing.
Europe is once again where the action might be this week, on Monday we get the latest unemployment rate for February; estimates are for no real change. We also get the flash report for inflation for the month of February. On Thursday we get the latest ECB interest rate announcement and following press conference, this meeting is likely to be a more subdued one than some of the previous months. Likewise on Thursday in the UK we get the latest BofE rate decision, what will be of more interest will be the release of the minutes of the meeting a couple of weeks later.
As we enter a new month equity sentiment has improved, as bond sentiment has weakened. How bonds perform in the coming weeks may become the main influence on equities in the short term.