Fear is a far more dominant force than euphoria, Alan Greenspan

Another week in which equity markets continued their solid start to the year. Tales of a hedge fund having to cover a large short position also possibly contributing to the rise of the past week. This rally does not feel, at least yet, that it is instilling the euphoria that often happens at points when equities are riding high. On the contrary, the higher equities go, it almost feels the greater the caution. An illustration could be the result of the weekly AAII U.S. retail investor survey, as bullish sentiment fell from last week. However, it is worth noting the Vix index rose on the week.

Kraft foods announced on Friday, with a little help from Warren Buffet, that it would like to buy the owner of many well-known brands, Unilever, offering just over $140bn. Possibly another example of an overseas company trying to take advantage of the weaker pound. The premium offered is circa 18% of the “undisturbed” share price. However, by Sunday evening Kraft had respectively withdrawn the offer as the management rejected the offer.

The different pictures the bond and equity markets currently paint has attracted comment from ourselves in the past weeks. John Authers writing in the Weekend Financial Times picks up on this point. Mr Authers points out that even Friday’s strong inflation report caused little of a ripple in the bond market, as yields on 10-year treasuries remain below 2.5%. He concludes that if Donal Trump can deliver his stimulus and the Fed remain “dovish” the market is priced correctly. As ever equities will take their lead from bonds.

Looking to the week ahead there is a reasonable amount of data coming Europe. On Monday consumer confidence for the Eurozone. On Tuesday, February’s flash Purchasing Manger surveys for manufacturing and services. On Wednesday, the latest German IFO sentiment survey. Despite economic data within the region remaining robust, sentiment surveys have been weakening. This has been attributed to the political uncertainty in the region. Another contributor, Greece, will remain in the headlines as the Euro-area finance ministers meet to discuss Greece’s third bailout, as the IMF’S participation remains uncertain.

On Wednesday, we get the second estimate for UK GDP for the final quarter of 2016, as well as the latest inflation data for the Eurozone region. The year on year rate is expected to rise to 1.2%.

Donald Trump watching will probably continue to dominate US headlines, although he does not seem to impact equity sentiment from day to day. Likewise, Brexit as the Bill moves to the House of Lords this week. As always there is a variety of data from the largest economy in the world. The focus may well be on Wednesday when the minutes from the last Fed meeting are released. These may give a better sense of the current balance between the doves and the hawks within Federal Reserve.

Posted on February 19, 2017 .