Equity markets finished the week higher than they started, the FTSE 100 performing the best of the developed markets rising just under 1%. The S&P 500 closed marginally higher, climbing 0.34% on the week. What is worth noting is the performance of commodity markets so far this year. The Thompson Reuters Commodity index, an arithmetic average of commodity futures prices, rose again to close up 3.4% since the start of the year. Commodity prices are rising in the face of the Fed tapering. Whether this rally in commodity prices is a response to the improving outlook, or a sign that inflation could start to pick up will split opinions. To my mind it should indicate a pick up in demand for raw materials, and is therefore further confirmation of the improving outlook for growth. It may also be a sign, for those who worry about the impending demise of the Chinese economy, that those concerns may be overdone.
In an article entitled "Investors count the cost of consensus" the Financial Times goes to highlight how following the herd does not always work when investing. At the start of the year consensus was to be long equities and short bonds, so far equities have fallen approximately 4% and bonds risen nearly 5%. The only consensual trade that has been so far worked has been the underperformance of emerging equity markets. I would imagine that call has become more consensual over the past week or so.
I was pleased to see the FT's John Authers pick up on my point that the bull market of 1990s saw multiple corrections of up to 10%, often driven by emerging market worries. I would be surprised if the current market correction is over, as they tend to last longer than a week or so and usually involve a fall of more than 4%. According to a note produced by Merrill Lynch, about $5bn came out of equities in the past few weeks. This statistic demonstrates to me that it does not take much for fear to re-enter equity markets, which I take as a positive sign for the longer term.
The focus of the week ahead will be Mark Carney's updated inflation report. With the more recent improvement in growth than expected, leading to a faster fall in the unemployment rate than expected, investors will be looking for clues as to any indication of changes in interest rate policy. In my opinion the Governor of the Bank of England will focus on the recent fall in inflation to keep interest rate expectations under control.