Volatility is back, the Vix index rose sharply over the week, for the second week in a row. The Index came within a whisker of 16 at one point, closing on Friday back below 15, but still rose almost 20%. After a good start to the week the FTSE 100 made a 300 point round trip over the past five days, finishing roughly where it started. The S&P 500 likewise started the week strongly only to give up all the gains by the close of play on Friday. The terrible events in Spain and Finland alongside a United States president whose credibility seems to be waning with every tweet marking a notable change in sentiment as the week wore on. The dollar finished the week modestly higher and US Treasuries remain in demand as the yield on the ten-year closed the week back below 2.2%. The gold price hit $1300 an ounce.
August can be a volatile month, liquidity is thin as traders are away from their desks, however never far from their Blackberry’s. The small cap index of the Russell 2000 fell on Friday and has now turned negative for the year. The smaller cap indexes such as the Russell 2000 are often seen to more closely reflect the strength or otherwise of a domestic economy. Smaller cap companies are often not as exposed to the broader global economy as the bigger caps. For this reason, investors can see the performance of the smaller cap indexes as a lead indicator for the larger caps. Perhaps it's worth noting the FTSE 250 index remains close to the record highs, despite concerns for the UK economy.
One slightly unexpected move this week was the rise in the oil price, again going to prove that when sentiment gets extreme there is often only one way for an asset price to go. According to the Merrill Lynch Fund Manager survey released this week, aside from the UK, energy is the most underweight in their portfolios relative to history.
We have mentioned last week the economic data from the US economy has recently been better than market expectations and this continued Friday as the Consumer sentiment rose to 97.6 according to the University of Michigan. This reading was the highest in 7 months.
Looking to the week ahead, one imagines Donald Trump could well continue to make headlines and impact sentiment. The annual meeting of central bankers takes place this week at Jackson Hole. Last week we saw the minutes from the last meetings of the central banks of Europe and the US this week we get to hear the latest thoughts from both chair persons of the respective central banks. Started in 1978 this event attracts academics, central bankers and policy experts to discuss future trends and interest rate policy. Durable goods orders on Friday may also draw some focus.
On Thursday, we get the second estimate for growth in the second quarter for the British economy. Expectations are for a small revision down for 0.2% to 0.3% and for year on year growth to be downgraded to 1.7%. We shall see.