It does not feel so long-ago pundits were wondering if the Dow Jones index could break the 20000 barrier, on Wednesday it crossed the 22,000 mark for the first time. It may be worth a foot note that neither the Russell 2000 nor the NASDAQ joined the rally on Wednesday. It may also be worth commenting that the Dow Transport index has now fallen 6% from its high a few weeks ago, now trading close to the 200-day moving average. Even though US equities keep driving higher, the main indexes in Europe have given back 5% since May. A lot of the recent rally in global indices has been driven by emerging markets and the US.
It has always been a source of encouragement that many guest fund managers have being the voice of doom and gloom on the worlds media as equities ground higher, they now seem to cast a much more optimistic tone. They are encouraged by the earnings season for US companies at least meeting and often beating expectations, even accounting for the benefit of the weaker currency. Company earnings in Europe are growing double digit year on year. There appears to be no deterioration in credit markets which can signal a selloff in other risk assets. Market breadth has shown no signs of narrowing.
The Bank of England left rates unchanged as expected at their monthly meeting. The vote was 6-8 in favour of leaving rates where they are, no-one voted for a cut and two voted for a hike. The Bank lowered their growth forecasts for the year ahead and are now in line with the IMF. They expect inflation to hit 3% in October, which seems unlikely to us. We feel the sense with the recent strength in the pound against the US dollar and weaker inflation data around the globe this will prevent any inflation shocks. With 10-year UK gilt yields remaining close to 1%, the bond market would appear to agree.
The FCA announced that they believe, despite the very low-interest rates we currently enjoy in the UK, there are over 2 million people in financial distress due to debt. This, however, did not prevent Philip Hammond authorising another 15 billion pounds worth of lending on Thursday. This is apparently needed to meet higher demand due to stronger than anticipated economic growth. Not by Mr Carney though, as he continues to take the view that the Brexit uncertainty is hindering the UK economy, that view is hardly a surprising one. There was some better economic news today as the UK services Purchasing Managers Survey beat expectations. This report could suggest the UK economic growth may pick up in the third quarter.
The pound did hit 1.3255 against the US dollar in the morning post the PMI data, its highest level since September last year. It did slip back later in the day after the more dovish meeting.