A better week for equities particularly the FTSE 100 rising 2% on the week, it benefited from a fall in sterling and improved sentiment towards the mining and oil sector. The index had been having a poor year and may have become a little oversold, so something of a recovery was overdue. For a change leading US equity markets underperformed those in Europe as the Stoxx 50 gained 3% against the S&P 500 just 1% in the past 5 days. Confidence returned as the Vix fell back to its recent trading lows. The US dollar fell against its basket of other currencies helping to boost commodity prices. The market was helped this week as flash Purchasing Manager Surveys that indicate the developed economy is continuing to grow at a steady pace. Emerging indexes also recovered as the currencies steadied.
We have included a chart, courtesy of Bloomberg, that points out there has been a breakdown between the performance of the S&P 500 and their definition of smart money flows. Smart money flows, as defined by Bloomberg, measures action in the first 30 mins and the last hour of trading in the Dow Jones. The theory is the emotional buying is done at the start of the day however the smart money waits till the end of the day when there is less noise.
Bond yields have been rising recently as there are indications that wage growth is feeding through into inflation data and monetary conditions tighten, if only modestly. The US ten-year treasury yield recently broke back over 3%. The two years has climbed to 2.8% as the US yield curve remains as flat as it has since the recession of 2008. It must be said in the context of value in most asset classes in our view the two years at 2.8% is starting to look quite attractive.
Brexit continues to make headlines as Theresa May tried playing hardball with the rest of Europe at the latest summit. The prime minister remains under the cosh from all fronts with continued speculation of a leadership challenge and now possibly preparing for another General Election as Labour are moving towards supporting the idea of another referendum on EU membership. Sterling may well come under further pressure this week.
Looking to the week ahead the main event will be the Federal Reserve’s interest rate announcement. Unlike virtually all developed economies the Fed are expected to continue their policy of raising interest rates, and for the third time this year by another 25 basis points. As always, the focus will be on the accompanying statement from the Fed chairman Jay Powell as this will set capital markets expectations for the Federal Reserve’s view on the economy and interest rate policy for the coming year. This meeting could set the tone for equity and bond markets in the coming month.