Equity prices continue to recover as bricks remain in the wall of worry

The best week since March for the S&P 500, the FTSE 100 now up on the year. The pain and misery of a few weeks ago seems a long distance away. The Vix index, at 12.65 heading back to the lows of last year. Along with the strong year on year growth in company earnings, that has resulted in the valuation for the S&P 500 coming closer to historic valuations, the repurchases offer shareholders an effective yield of 3% according to Barron’s, possibly improving equity market sentiment. Overall, if Barron’s composite sentiment indicator is any guide, equity sentiment remains far from the heady days at the start of the year.

The flattening of the US yield curve has been one of the debating points of the year, is this the bond market forecasting the next US economic recession? We have often argued that the curve flattening is a function of the actions of the ECB supporting the European bond market, rather than the bond markets economic forecasts. The recent weaker data from the euro area leading to suggestions the ECB could extend its bond purchase program will probably keep the curve from steeping. The two year rising as a function of the Federal Reserve’s desire to raise interest rates this year. The US ten-year yield being pegged up by the interest rates obtainable in German Bunds. The gap between ten-year US treasuries and the equivalent German bund remains close to a 30 year wide.

The oil price has been another topic for discussion. Brent crude hit almost 80 dollars a barrel this week as Donald Trump announced he will not continue to support the Iran nuclear deal. A rising oil price and economic recessions are a well-trodden path.  Just look back to 1973, 1980 and obviously most recently 2008. A rising oil price is a sign of economic strength, but eventually the squeeze it puts on the economy, combined with its inflationary impact leading to monetary tightening results in an economic recession.

Looking to the week ahead, Iran may continue to make a few headlines, but the focus may turn back to trade talks. A delegation of economic advisors will come into The US this week for the second round of trade talks. This is ahead of the US finalising its list of Chinese products to hit with tariffs.

It is a busy week for macro data, on Tuesday we get Chinese industrial production and retail sales, for the UK average earnings and unemployment rate. For Europe the second estimate for Q1 GDP and the ZEW sentiment survey, along with Industrial production for the month of March. As for the US economy the Empire State manufacturing report, April retail sales. Wednesday euro area inflation which has recently, in common with other regions, dipped away from the 2% target. Forecasters expect the euro area year on year rate to fall to 1.2%.

Posted on May 13, 2018 .