Central bankers once again demonstrated this week that they are prepared to keep pumping liquidity into the system, with the continued aim of spurring economic growth . Equity investors received another surprising boost on Friday as the Bank of China cut its benchmark one year lending rate by 40bp. The move by the Bank of China has led to speculation that we may see further measures of a similar nature from India and South Korea in particular. Commodity sectors had seen sentiment drop; the latest release of the Merrill Lynch Find Manager Survey reported that the resource sector was the most underweight by fund managers, rallied strongly on the news. Copper hit a three-week high and oil climbed back over $80 a barrel.
As well as the Chinese news, the ECB confirmed that they had started buying asset backed securities. Alongside Mario Draghi’s speech at the start of the week hinting at further measures to stimulate the eurozone economy, this led the eurostoxx 300 indexes of European companies being the strongest performer of the developed markets in the past five days. Equity markets remain slightly expensive compared to history, particularly the US; this has meant fund manager cash levels remain high, but it appears one should not underestimate the resolve of central bankers at present.
European bond yields fell again during the week, the German 10 year bund now yields 0.77%. One has to continue to believe that such meager returns compared to the yield on the equity market should continue to drive money into risk assets despite valuation concerns.
It is a quiet week for economic data in Europe, except for Friday, when we get the latest inflation and employment data. Once again expectations are for inflation to remain stubbornly low and unemployment stubbornly high. In the UK headlines will be made on Wednesday as we get the second estimate for Q3 GDP.
The US week ahead is front end loaded as its Thanksgiving on Thursday followed by the slightly oddly named Black Friday, when retailers cut prices across the board. With out wishing to tempt fate equity prices have tended to remain resilient during this period of celebration. However there does not seem to be much correlation with the results of Black Friday and the stock market performance in the fourth quarter. One would expect with the fall in the oil price and the recent rise in consumer sentiment that Friday will see retailers reporting strong demand.