Our chief weapon is surprise

Thursday was central bank day as the ECB and Bank of England announced their latest monetary policy decisions. Despite the recent slowdown in economic activity in the euro area the ECB stuck to its rhetoric in July and plans to curtail its bond-buying program by the year-end and start raising interest rates this time next year. The Bank of England likewise stuck to the script and voted to leave interest rates where they are. With Brexit headlines and the surrounding uncertainty, not so much of a surprise. The latest US inflation data reported that consumer-led inflation had fallen between July and August. The core US inflation rate also fell, possibly as the effects of the stronger dollar makes an impact.

As a result, the US dollar weakened on the inflation data and the pound and the euro rallied. Equity markets overall were understandably little impacted by the announcements as much was largely expected. Equities were boosted modestly in early trade as there was the talk of trade talks between China and the US.

The Vix index has fallen back in the last few days, suggesting fear has receded amongst equity investors. This could suggest after a rocky start to the month, particularly for Europe, some stability could come back. The S&P 500 remains within a hare’s breath of its all-time high, however equity markets in Europe remain in the doldrums. It seems unclear at present what can drive that gap to close, what will change sentiment towards European equities?

One could have expected a lot from today that could impact investor sentiment, two central banks meeting, US inflation data and yet the day passed with little impact. As the financial press continues to highlight the tenth anniversary of the Lehman collapse, the talk continues as to what will cause and are we around the corner of the next crisis?

Possibly, but history tends to tell you that these moments tend to occur rather as the Monty Python portrayed the Spanish Inquisition. Nobody expects them!

Posted on September 13, 2018 .