"Coming events cast their shadow before them" Chinese proverb

Plenty of news flow to once again rattle investor cages. Global cyber-attacks, Greek economy falling back into recession in the first quarter threatening the next bailout, as well as reports in the US Washington Post that Donald Trump had endangered national security by sharing highly classified information in an Oval Office meeting with a Russian Diplomat. This follows the sacking of the head of the FBI during an ongoing investigation by the FBI between the Trump Campaign members and Russia in last year’s election. On top of all that North Korea continues to fire missiles, this time in the general direction of Russia. None of these breaking headlines caused so much of a ripple across global equity markets at the start of the week. Indeed the FTSE 100 and the S&P 500 make new highs.

Equities instead were underpinned by a general rally in commodity prices, particularly oil in response to an agreement between Russia and Saudi to extend production cuts by another 9 months, adding 2% to the price of a barrel of oil.  Indexes such as the Vix, which are supposed to reflect levels of fear and greed, or perhaps complacency and confidence remain close to historic lows. Equities appear to remain supported by expectations of economic growth and a lack of more attractively priced alternatives. However unlikely it is a cyber-attack could bring down the internet, it was possibly surprising that the attack had a negligible impact as it did on capital markets, considering how much of today’s world now relies on the internet.

Back to more traditional events to address the investor mind, the latest inflation data released on Tuesday reported year on year inflation as recorded by the Consumer Price Index rose above expectations of 2.6% to 2.7%. The reaction of the UK gilt market was negligible. The yield on the ten-year gilt rose modestly to 1.14%, a pretty miserly yield when reflected in real terms. Two year yields, which are supposed to better reflect interest rate expectations also ticked higher, however at 15 basis points would suggest the markets still don’t believe the Bank of England are in the mood to change interest rate policy any time soon.

The latest Merrill Lynch fund manager surveys continues to report that cash levels remain elevated, equity valuations are considered high however equity allocation remains high. This probably fairly reflects sentiment not only of the professional fund manager but also the retail one.

Equities may look expensive on a standalone basis but compared to bonds, with inflation rates having picked up they remain attractive compared to bonds. The day that no longer remains the case could well be the trigger for equity markets to rerate.

Finally, on Tuesday we received the latest industrial and manufacturing production data for the US economy. After a series of weaker than expected series of economic data in the early part of the year, leading to the comments from the Federal Reserve at the last rate setting meeting. Industrial and manufacturing picked up in April and beat expectations.

 

Posted on May 16, 2017 .