The mid-term elections are now out of the way leading to a relief rally in US stocks on Wednesday, however, the week ended badly as technology and commodity stocks sold off. This did not prevent all three major US equity indexes finishing the week again in the blue. Now it’s back to focus on global growth, trade wars and US monetary policy. One piece of economic data at the end of the week, China’s latest import-export data for October came in better than expectations despite the ongoing trade war. The meeting of the Federal Reserve this week left investors with the almost certain confirmation that they will raise interest rates in December.
Taking a quick look through the indicators that can give some underlying sense as to where sentiment lies, one would call it a bit of a curate’s egg. The Vix index fell back below 20, closing the week just above 17. This would suggest investors are not paying up for protection. The Transport index rose, another encouraging sign, likewise the USD outperforming the Japanese yen. On the flip side, the S&P 500 has once again outperformed the smaller Russell 2000. The smaller index is considered a better bellwether of the underlying domestic economy. Industrial shares underperformed utility companies in the past five days, and discretionary consumer modestly underperformed non-discretionary. A modest rise in the Vix on a near 1% fall in the S&P 500 was probably an encouraging sign. Yields in the US treasury market finished the week little changed, not really moved by either the midterm elections or the Fed meeting.
Looking to the week ahead, aside from the on-going saga known as Brexit. The Italian Governments deadline for a redraft of the budget on Tuesday. There seems little expectation of a major shift in their plans. Other macro events that will focus investor attention will be the US Consumer price index for October. Expectations are for the index to rise from 2.3% to 2.5%. Inflation looks set to remain above 2% and reinforce the Federal Reserves desire to raise interest rates in December. The UK will also be publishing October inflation data, and as with the US, inflation is expected to have risen in the previous month. As for Europe, we get third-quarter GDP estimates, there have been signs that the European economy has been slowing down. We also get the German ZEW survey, the index has been declining for most of the year. This index measures the level of economic confidence amongst analysts. The sentiment is currently pretty bearish.