The month of July ended far better for equity investors than the end of June did. The shadow of Greece is hopefully on the back burner for a while, even if the agreement feels like a sticking plaster over a wound that may need major surgery. The focus over the past week has returned to China and interest rate policy.
Bond and equity prices rose in the past week as investors once again re-evaluate when they believe the Federal Reserve will move on interest rates. At the start of the year June was the red-hot favorite, then as we approached that date September became favorite. As we approach September, December is starting to look more favorable.
As we are now in full holiday mode fund flow data recorded little in the way of changes in asset allocations. Earnings season is now in full flow with just over 50% of the Stoxx 600 index of European companies having reported for q2. So far the earnings season in is broadly reassuring with 55% of companies beating on earnings, against a historical average of 53%. It is fair to point out expectations for earnings growth have moderated from the start of the year.
Looking to the week ahead, Thursday will be the focus for the UK as the Bank of England announces its latest interest rate decision and releases the minutes from the previous meeting. Expectations are that the hawks (those favoring rate rises) will once again vote in favor of a rise in rates. On Thursday the Bank of England releases its latest inflation report. The report will probably focus on the recent rise in hourly earnings, and productivity when it decides on the implications for UK inflation.
For the US the focus is likely to be the employment data at the end of the week. Employment and wage growth are seen as one of the major influences on monetary policy. This data will be viewed against the latest Employment Cost Index, which rose in the second quarter at the slowest pace since records began in 1982, according to the FT. China’s officials released its latest service sector activity on Saturday, encouragingly it shadowed a further pick up in steam in July.
As we enter the new month stocks, so far this year is the only asset class to offer positive returns, as both bonds and commodities have produced negative returns. If Merrill Lynch and the AAII retail investor surveys are to believe equity sentiment is once again reassuringly cautious.