A mixed bag for bonds and equities

A decent end to the week helped reverse some of the losses developed equity markets suffered in the earlier part to the week. We pointed out how developed equity market indexes are no longer being driven as much by the price of oil, but more by the price of bonds, this week was a prime example. As speculation continues whether the worlds producers will come to an agreement on production, the oil price held steadily above $50 a barrel. In contrast yields on developed bonds rose over the week, as prices fell. The yield on 10 year UK gilts rose on Friday to 1.1%, post Mark Carney’s presentation that he is happy for inflation to tick up in the short term, possibly above the government’s target of 2%. Two year yields, the most sensitive to interest rate sentiment, have likewise risen but not as much as the longer end of the curve.

Although gains in the yields of US treasuries were paired on Friday after Janet Yellen suggested that the Federal Reserve may need to run a “high pressure economy” in order to reverse the effects of 2008. Yields on US treasuries have risen from 1.63pct at the start of the month to 1.8% on Friday.  So far the rise in bond yields has been modest and orderly, and remain close to historic lows.

The performance of sterling has made much news in the past week, particularly after the spat Unilever had with Tesco’s. The pound has lost 5% against the US dollar post the Conservative party conference. However, not all of this move is down to negative sentiment on the pound as the US dollar has gained over 3% against a basket of currencies in the past month. Tom Stevenson, in Sunday’s Telegraph, points out how the performance of the FTSE 100 has been boosted by recent sterling weakness. He argues that those who hope for further sterling weakness may be disappointed as the pound is now almost 15% undervalued on purchasing parity terms against the US dollar.

Looking to the week ahead, earnings should continue to dominate the headlines. After the poor start from Alcoa, the end of the week saw better than expected numbers from Citi, JP Morgan and Wells Fargo. As for the macro outlook, on Tuesday the latest US inflation data, will be the focus for the week across the pond. Europe, later on Monday we too get the latest inflation figures for the region. On Thursday we get the monthly interest rate decision for the euro area from the ECB with the following press conference. Brexit will continue to make headlines, on Tuesday the German Finance minister Wolfgang Schaeuble gives his views on the EU’s future.

On Wednesday the last of the presidential debates takes place. Let’s hope someone will bash the heads together of the two people fighting to be the leader of the free world and try and remind them to act accordingly. Also on Wednesday we get third quarter GDP estimates for the Chinese economy.

It’s a busy week for UK economic data, on Tuesday inflation data which will be eagerly watched to see any impact of the fall of the pound. On Wednesday the latest unemployment rate, as well as the Bank of England publishing its agents monthly report of business conditions. On Thursday September’s retail sales data. 

Posted on October 16, 2016 .