A week that was dominated by the central banks of the UK and America both reinforced to the markets that neither were in the mood to remove the pro risk policies currently in place. Janet Yellen decided why use one word when 25 others will do to transmit the message. The budget was, as we said, something of a non-event, or perhaps a more predictable outcome. The Federal Reserve and the capital markets seem absorbed as to the impact the first rate rise will have on the bond and equity markets. The Sunday Telegraph feature article quotes that a rate hike by the Fed could cause turmoil. One could take the contra view and suggest that the day the Fed decide to move it will because they are happy the economy is truly on a sound footing and can deal with the consequences, and many fears may not be realised.
With a gain of over 4% on the week the FTSE 100 out stripped other developed markets for a change, the reversal in the US dollar helping the resource sector rally at the end of the week. The eagerly awaited close above 7000 finally came on Friday. Having made several attempts to break above the 7000 level hopes will be for the UK blue chip stocks to continue higher.
The latest flow data reported another week of large inflows into equities, just over $20bn. It was another week of inflows into investment grade bonds, taking the total to 65 consecutive weeks. The Vix fell again, back below 15; surprising the AAII investor survey reported a fall in bullish and a rise in bearish sentiment amongst retail investors.
Bonds moved in tandem with equities this week as is so often the case as US treasury yields fell, along with gilt yields. Gilts were helped by comments from a senior economist on Friday at the Bank of England suggesting that he felt rates were as likely to fall as rise this year in the UK. We do not believe that another cut in rates in the UK is a likely proposition.
The week ahead may well be dull in comparison to last week. The earnings season is now pretty much complete, earnings revisions year on year are falling which is slight concerning against a rising equity market.
The macro announcements that will focus the economist’s attentions this week, on Tuesday in the US reports the latest inflation data. During the week we get speeches from two Fed committee members, it will be interesting to see if they stick to the dovish message of last week. Likewise in the UK we get the latest inflation data on Tuesday, and on Monday the latest industry reports from the CBI will probably make some headlines. For Europe Greece may make the headlines again as Prime Minister Tsipras meets Angela Merkl on Monday to make another attempt to solve the Greek debt problem.