A funny old start to the year

The first furlong of another 12-furlong race is complete, last years front runners remain in place, US and Emerging equities. Bringing up the rear, Europe and particularly the FTSE 100, as it finished the first month of the year down 2%. So, goes January so goes the year, is the adage. That, in theory, should mean we get another good year for risky assets. A lot may depend on what bond and currency markets do. Bonds has been the story of the year so far, as sentiment towards the asset has turned cautious. Supply is set to increase of US Treasuries as the Fed continues to unwind the balance sheet and demand may weaken if inflation expectations increase, sending yields higher.

The Federal Reserve held the first meeting of the year and its last under the stewardship of Janet Yellen. Janet Yellen must be delighted to be able to step aside at a point when she can claim to have averted a recession in the US economy, and now leave at a point where the Fed has started the process of normalizing interest rates and economic growth is on the increase.

The meeting left interest rates where they were, as expected. The view remains that the March meeting will be the timing for the next rise. The statement appears at pains to reiterate they are in no hurry to tighten and the balance of policy should remain accommodative. The meeting was overall uneventful and both bond and equity markets were little moved over the announcement. The Vix index fell back probably in response to the reassuring phrases from the Fed.

The start of the month is Purchasing Manager time as the research houses release the index readings from the previous month. This data is always considered a window on growth for the coming months. China, an economy the world still relies upon for a lot of its growth, index readings came in pretty much as expected. Manufacturing was slightly weaker, services a tad stronger than the forecast. The Caixin index which is focused more on smaller and medium companies was exactly in line with market forecasts. Manufacturing in the UK slowed to its lowest level since June, however, at 55.3, the manufacturing base remains in expansive mode. Likewise, US PMI data came in line, to slightly better than forecasts.

Later on, Friday is what the market will be focusing on, this is because we see average earnings for January and the latest US unemployment rate. Should average earnings jump more than the expected year on year rate of 2.5% this could lead to further weakness in the bond market and this could well feedback into equities.

Posted on February 1, 2018 .