What a rally in equity prices, with over 40 years of experience trading global stock markets it’s hard to remember a time when equity markets recovered and pushed on so swiftly. The FTSE 100 gained over 10% from its Brexit low, to close Friday at a 12 month high. The FTSE 250 has likewise had a 10% rise from its lows, to finish the week higher than where it started post Monday’s sharp fall. These type of moves are far more associated with corrections than rallies. Rises tend to be gentle and more muted than falls. It is hard to know what to make of this rise, is it the “dead cat bounce” driven by short covering? Or a believe that the UK will use the recent vote as a bargaining chip in the coming months to negotiate a deal in Europe on our terms. Some of this may depend on who is elected as the new leader of the conservative party. Mark Carney’s comments on Friday suggesting more monetary stimulus definitely added to the positive mood.
The bond market was a much a story as the equity market as yields fell around the world. Two-year gilt yields fell into negative territory and the ten year below 1%. The bond market’s reflection on the events of the past few days is the Brexit vote will impact global growth and inflation.
Soon equity investors will start to focus back on the fundamentals of the global economy and in particular the second quarter earnings season. Alcoa, the traditional show opener reports a week tomorrow. According to Fact set analysts are forecasting for the fifth quarter year on year earnings to fall for the S&P 500. Estimates are for a fall of 5.2% year on year, however they are forecasting earnings to improve in the second half of the year.
Friday was a data packed day as many countries around the globe saw the release of the final readings for June’s Purchasing Manager surveys. Without going from country to country, and just summing up the results, most including the UK, came in line or slightly ahead of expectations. Suggesting the manufacturing bases in many countries around the globe continue to expand modestly. The Euro area released its June unemployment rate which remains above 10% despite the modest improvement in the economy.
Looking to the week ahead the focus for the US will probably come towards the end of the week. On Wednesday we get the minutes of the last Federal Reserve’s rate setting meeting. These will be interesting to see how the mood was for a rate rise in July, however the meeting did take place before the Brexit vote. Towards the end of the week we get the unemployment rate for June as well as June’s non-farm payrolls data. The Federal Reserve may face the dilemma of a modestly improving US economy with modest wage growth against an uncertain global backdrop when the next rate setting meeting takes place.
It’s a busy week for economic data for the British economy, first thing on Monday we get the June construction PMI. On Tuesday the services PMI as well as the Bank of England’s stability report. Thursday its house prices as well as industrial production and on Friday June’s balance of trade. The start of the month is always a busy one and Europe is no exception, what may well be of interest will be a speech due from Mario Draghi on Wednesday, where he might express his views on the recent events.