The low volatility grind higher seem a dim and distant past

As the FTSE 100 traded right through 7000 on Thursday equity markets remain choppy, the slow grind higher earlier in the year seems a dim and distant past. Donald Trump’s announcement on trade tariffs to China not helping sentiment. The Federal Reserve announced their latest interest rate decision on Wednesday evening and as expected raised short-term rates by 0.25%. Fed officials also raised their projections for future rate hikes in the coming years. Mr Powell believes the US economy is stronger than it has been in the past 10 years. The Fed stuck to their prediction of three rate hikes this year. The financial press seemed divided as to whether the statements were more dovish or hawkish than the market expected. In the short term probably slightly more dovish, in the coming years possibly more hawkish. The Fed also believes that the fiscal changes will continue to have a meaningful impact on demand for the coming three years.

Looking how the markets reacted to the comments, the S&P 500 dipped slightly. Yields on the ten-year US treasury bond rose trading above 2.9% at one point however by Thursday morning fell back below 2.9%. The two-year yield slipped back below 2.3% have hit 2.35% earlier in the week. The dollar basket fell slightly. Putting everything together one would suggest that the market had already anticipated a lot of last nights comments. Overall the Fed remains optimistic for the state of the US economy.

The modest slow down in growth across most developed economies was again highlighted by the latest European Purchasing Managers surveys. Although the surveys continue to show economic expansion, the drop was larger than expected. German business sentiment, as measured by the Ifo economic institute, fell to an 11-month low. However, the index remains close to historic highs which could suggest sentiment could fall further still.

The Bank of England voted 7-2 to keep interest rates where they are, May is still the favourite for the next rate rise. Equity prices continue to fall in the UK as sterling rose. The fact that one can receive dividend yields in excess of 5% for many blue-chip UK FTSE 100 companies at a time when 10-year gilt yields remain close to 1.5% appears to offer little support for prices. The FTSE 100 is down 10% this year and almost 12% from the highs. In one way not a lot has changed. Sterling is close to where it has been all year, likewise gilt yields. Economic growth for the UK and the global economy, in general, is where it was. If anything Brexit negotiations are more optimistic than they were. It just goes to show what sentiment can do.

Posted on March 23, 2018 .