A week that started with uncertainty ended with equity markets regaining their poise. A combination of reassuring economic data from all the major regions around the globe, as well as speculation that the ECB may look to buy corporate bonds, meant US, European and Asian markets all finished higher on the week. US ten year bond yields rose slightly, as did the US dollar reflecting the better economic data. The Vix fell 25% on the week closing just above 16, mirroring the improving sentiment. The Russell 2000 index of small cap stocks, and high yield bonds also finished the week higher.
Fund flow data reflected the increase in equity fear over the past couple of weeks as money flowed into money markets and bond funds and out of equity funds. With a couple of the months to go, according to Merrill Lynch, equity funds have attracted $71bn this year, but over twice that amount has gone into bond funds.
The news that 25 banks out of the 130 banks tested in Europe have failed the stress tests, with an overall shortfall of 25 billion euros will probably make some headlines on Monday morning. Most analysts are likely to be glad the results of the tests are now known, and the fact that some failed will give the tests a form of credibility. Italian banks made up nearly one third of the banks that failed, with Greek, Austrian and Spanish banks making up the balance.
It was also a good week overall for companies reporting as heavy weights such as Procter and Gamble, Microsoft, Caterpillar and UPS all beat expectations. Due to the nature of their business, UPS results are often taken as a proxy of the overall economy and the strength of the consumer.
The upcoming week will see a continuation of the earnings season, as European companies reporting picks up. The macro data points that will grab the headlines will be for Europe on Thursday and Friday as we get a series of sentiment data as well as consumer confidence. On Friday we get the monthly employment and inflation data for the eurozone, expectations are for little change to the current picture. It is a relatively quiet week in the UK from a macro point of view; the latest nationwide year on year house price changes is the only thing of note on Thursday.
With just over two months of the year to go, traders and investment managers will hope last week saw the start of the much-anticipated Christmas rally.