I don’t want realism, I want magic Tennessee Williams

So goes the month of January so goes the year so they say.  A momentous week for the UK as we start a new life outside Europe. After a decent start to the year, one in which equity investors started with great optimism. The past week has seen all the early gains now wiped out. The yield on the ten-year US treasury fell below that of the two-month bond post the Federal Reserve rate announcement this week. It is worth remembering the inversion of the yield curve spooked equity markets in the early part of 2019. The S&P 500 has corrected about 3% from its peak earlier in the month. The index is now close to its 50-day moving average but remains well above the 200 days. That may be the level that provides greater support.

Nearly 50pct of the companies in the S&P 500 have reported. This has been a better week as several technology companies, Microsoft and Amazon to name a couple along with Colgate in the consumer sector helped reduce the overall earnings decline for the fourth quarter. Currently, the earnings decline is 0.3%, this would represent the fourth straight earnings decline, should this be the final result.

The correction was on the cards, we have been discussing the possibility almost from the start of the year. The fundamentals remain supportive, cheap money and economic growth, the reality was that valuations had become too stretched. Forecasts for growth in the US economy are however being lowered after weak trade data and falling wholesale inventories in the past few days.

Aside from a bid for bonds, other asset classes that are considered safe havens in the week attracted investors were, Gold rose, the yen gained against the US dollar. Sentiment, has been bullish for many months is slipping back into fear territory, but maybe not yet enough to get optimistic. The Vix rose as investors paid up for protection against further falls.

Looking to the week ahead the start of the month always sees the release of Markit’s global Purchasing Manager Surveys. These are important as they are taken as an indication of expansion or contraction of the manufacturing and service sectors. Corporate earnings will continue and start to accelerate in Europe. Notable companies reporting this week will be BP, Walt Disney, Uber, Ford and Alphabet.

It is possible the coming week sees something of stabilisation in equity markets, after last weeks correction. The probability is we are not through the period of volatility. February is often one of the weaker months of the year. The coronavirus has given equity investors a cold feeling. The recent inversion of the yield curve will add to the uncertainty and get analysts and their charts hard to work.