Another solid week for equity prices, the S&P 500, the Stoxx 50 and the Nikkei all gained modestly on the week. The FTSE 100 lagged slightly as the pound has continued to rally against the US dollar, coming close to $1.4, and the oil and mining sectors came under a little pressure. Equity investors continue to back the view that Goldilocks is alive and well. The earnings season is in its infancy as only 11% of the companies in the S&P 500 have so far reported. According to Factset fewer companies are reporting actual EPS above estimates compares to the five-year average. In aggregate, companies are reporting earnings that are 53% below their estimates. This is early days though and more heavyweights will be reporting in the coming weeks.
The Vix index did rise on the week, touching almost 13 at one point, suggesting some investors may have been paying attention to concerns from technical analysts that the equity market is looking very overbought. It may also have been concerned that the US government would be forced to shut down if no agreement was found between the Democrats and Republican’s to raise the debt ceiling. In the end, no agreement was found, however, there seems to be little reaction so far as the day trading platforms are indicating that the S&P 500 will open only modestly easier on Monday. The Vix index finished the week closer to 11.
Bond prices remain in focus as the yield on US ten-year treasuries hit a three year high of 2.64% this week. Bond prices continue to fall on expectations that the tax breaks will further stimulate the US economy, leading to wage increases and further inflationary pressures. Despite the positive sentiment to the US economy at present, possibly contra to intuition the Michigan Consumer confidence fell for the third month in a row.
Looking to the week ahead, earnings will remain in focus as companies such as Netflix, Procter and Gamble, Johnson and Johnson, Caterpillar and Paypal report in the coming days. The European earnings season will also start to kick in. From a macro point of view on Wednesday Markit Purchasing Manager surveys and on Friday Durable goods and Q4 GDP will draw investor attention.
As for the UK, on Wednesday we get the latest unemployment estimate along with average earnings. On Friday the first estimate for GDP growth in the final quarter of last year, forecasts are for year on year growth of 1.8%. As for Europe, the first press conference of the year post the interest rate decision earlier in the day. The euro has continued to be well bid, meaning the ECB may have a tricky balancing act. With the economy continuing to perform there may be some pressure to indicate that further monetary tightening may be in order, however, this could lead to further strength in the euro, which could have a negative impact on economic sentiment for the region.