A strong rally on Friday helped the FTSE 100 finish the week close to where it started it. Equities in the broader European indexes performed less well, as they were obviously more effected by the revelations within Volkswagen. Friday’s sharp rally that saw equity markets in Europe rally between 2 and 3% may be partly down to fund manager’s window dressing as we approach the end of the third quarter. For the first time in a couple of weeks the Vix closed the week higher than at the start.
With only a few days to go, this has been a miserable quarter for equity investors, compounded by the events in Germany this week. The leading index of Europe, US and the UK companies have all fallen approximately 10% in the quarter. The Dax index of leading German companies has been particularly hard hit, falling approximately 13%. The VW saga, once again damaging investor’s confidence in the equity market as an investment class. US treasury yields finished the week close to where they started, not only the week but also the year. The oil price, for the time being at least, appears to have found a trading level as Brent Crude continues to bounce around just below $50 a barrel. The gold price rose to its highest level in a month.
Janet Yellen on Thursday in a speech at the University of Michigan stressed that despite not moving on rates this month the Federal Reserve still expects to move before the year is out. We remain skeptical.
Fund flow data reported a large flow of money returning to money market funds and away from equities. Out flows from the emerging market funds appears to be slowing, with the smallest outflows for two months from equity and debt funds.
Looking to the week ahead it’s a fairly busy week in general for macro data. The UK sees the release of September consumer confidence, year on year housing prices and the final reading for q2 GDP. For the euro area on Tuesday business and industrial sentiment reports, Wednesday inflation and unemployment rates and on Thursday a speech from Mario Draghi as well as the Final reading for September’s Purchasing Managers Index.
As for China where there has been a lot of focus, Thursday sees the release of September’s service sector PMI; expectations are for the figure to come in just below 50.
The focus for the US will probably be Wednesday as the deadlier for funding for the new fiscal year. This funding needs to be agreed to prevent the possibility of a federal agency shutdown on Thursday.
Equity sentiment, according to Merrill Lynch, has not been this cautious for nearly 4 years, which is hardly surprising after the events of the past three moths. Friday’s rally could be partly down to some quarter end window dressing, we shall see if this continues into the month end.