A mixed week for global equity markets as investors appear to continue to favour the growth sectors over the value ones. Investors prefer the sectors that offer bond-like returns as interest rates remain low over those more cyclically orientated, despite the expectation economic growth should pick up this year and the valuation gap. The S&P 500 remains close to all time high’s, the Nasdaq index which had been leading the market higher, however, has come off its highs recently marked time in the past five days. The expected rise in US interest rates last week was met with a fair degree of indifference. 10 year US Treasury yields remain close to 6-month trading lows at 2.15%. When US Treasuries are probably considered the lowest risk asset class for investors, this yield still looks attractive to what you can get in the UK or European from government bonds. This probably goes part way to explain why yields have fallen this year.
The FTSE 100 gave up just under 1% on the week. The pound held firm against the US dollar and gained modestly against the euro. This is despite the continued political uncertainty and a prime minister that appears to have lost all confidence in her own judgement or ability to lead.
Alongside this, a Governor of the Bank of England that cut interest rates when the economy was doing fine and if Thursday’s vote was an indication may be forced into an increase as the economy starts to wobble.
The fall in the oil price has been notable over the past month, the Brent Crude price has fallen from $54 at the start of the month to close on Friday just above $47 a barrel. This should help inflation projections going forward, however, a falling oil price does put pressure on oil producing nations economies. The recent fall seems precipitated by a disappointing report on US oil stockpiles. Attempts to stimulate the oil price through cuts by the oil producing nations yet don’t appear to be having the desired effect. A resurgence in shale gas production seems to be adding to the oil supply, along from weak demand from the US driving season.
Brexit talks are supposed to start this week as David Davis is due to meet Michel Barnier, chief EU negotiator. Theresa May is due to set out her legislative programme in a delayed Queens speech as she continues to try and strike a deal with the DUP.
On the economic front it's a quieter week for the UK, however, we do get the Rightmove House price index month on month. There has been some weakness in house prices in the past weeks. It’s a relatively quiet week in the US as well, on Friday Markit release their flash estimates for the June Purchasing Manager surveys. Likewise, for Europe, we get the flash June estimate for the eurozone PMI. Recent surveys have reached their highest levels since before the crisis.