The much anticipated but inevitably painful market correction continued this past week, caused by a cocktail of economic, geopolitical and environmental concerns. After Wednesday’s rout, markets calmed themselves on Thursday, and closed the week on a positive note as central bankers came together to reassure investors that interest rate policies are to remain accommodative for the foreseeable future. The S&P 500 finished the week 1% lower; coming at one point during the week within 0.2% of the long awaited 10% correction from the highs earlier in the summer months. As of Friday only the US and the Hong Kong equity indices are now in positive territory from the start of the year.
The big talking point during the week was the sharp fall in US bond yields; at one point the ten-year treasury yield fell to 1.89%. At the other end of the scale Greek ten year yields rose sharply reaching over 9%, having been below 6% a month or so ago. As confidence returned on Friday in risk assets the yield in the 10 year Greek bond fell, closing back just above 8%.
The Vix or fear gauge as its affectionately known, climbed above 30 at one point during the week, by Friday’s close it was up just 5% finishing at 21.99. The Russell index of small cap stocks closed the week almost 2.5% higher, offering more encouragement to the big cap investor.
The previous weeks had seen large outflows from equity funds. Fund flow data from the past week continued to see outflows but at a much slower rate. Treasury and investment grade bonds continue to see big inflows, over $10bn in the past week.
Earnings announcements are now in full swing with the finance sector giving a decent start to the q3 season. Eighty-two of the S&P 500 stocks have reported so far, representing just less than one quarter of the index by market capitalization. So far, according to Zack’s earnings are up 4.2% year on year, just about in line with expectations. The coming week will see heavy weights like Apple, IBM, Coke and Dow Chemical, to mention but a few in the US and the start of the main reporting season in Europe.
On the macro front in the US we get the usual broad brush of economic data, including inflation, manufacturing and home sales. Europe the data is a bit thinner except on Thursday when we get consumer confidence and the results of the latest Markit flash PMI reports. China will gain attention this week as Tuesday sees the release of the latest GDP reports and year on year industrial production for August.
The coming weeks into the year-end will be dominated by the results season, the macro data and comments from central bankers on interest rate policies. Through out the uncertainty and volatility it is worth reminding oneself that bear markets tend not to occur when central banks and governments are in pro growth mood. Bear markets tend to occur, irrespective of valuations when central bankers are looking to put the brakes on the global economy and this is not the case at this point in time.