The Bank of Japan did not, as we had speculated based on the recent performance of the yen, expand its stimulus program on Tuesday. The governor of the bank taking the view that the country’s first sales tax hike in 17 years would not derail a budding recovery. The governor did go on to repeat his view that the BoJ would not hesitate to expand monetary easing to reach its 2% inflation target by next year if needed.
The FTSE 100 did not react to the National Institute of Economic and Social Research (NIESR) report that the British economy probably grew by 0.9% in the first quarter of 2014. NIESR believes the first rate rise is still some way off as a sizeable amount of slack remains in the economy. These comments reflect a speech recently made by Janet Yellen in which she highlighted the considerable slack in the US economy. Central bankers continue to want to make it pretty clear that they do not want to raise interest rates until they believe their economies are on a solid path to recovery.
Equity markets continue to be under pressure on Tuesday. US treasury yields rose modestly at the start of the day, only to fall back below 2.7% by the close. Increased tensions in the Ukrainian region affected investor sentiment. One had the sense recently that the last push in equity markets, particularly in the US was driven by limited volume, and possibly some short covering as speculation increased that the ECB and the Bank of Japan may increase the monetary base in the coming weeks.
Some of the froth has probably been taken out over the past few days. The recent correction in some of the Internet and social media stocks would also suggest that. The FTSE 250 index, which had been up nearly 4% earlier this year, has now given back all its gains.
Earnings are what ultimately drive equity prices and Alcoa on Tuesday night reported earnings better than the market expected. Revenues came in line with expectations. The statement that accompanied the earnings release talked about global end market demand remaining solid for aluminum. Alcoa’s day as a true bell-weather is probably over, but the results would appear to be a solid enough start to the earnings season and the shares rose almost 3% in after hours trading. One further point of note, Alcoa’s share price has risen over 40% in the past 6 months, despite this, two-thirds of analysts still have the stock as a hold or sell rating according to Analyst Network Rating. Time to worry about Alcoa will be when the opposite is true.
What does give me hope for equity markets is the continued skepticism particularly in the financial press as to the sustainability of the rally. Concerns over corporate margins, the state of the Chinese banking system and valuations seem to be the greatest bugbears. I still get the sense that greed has not yet taken over fear, and that most of the fear is based on altitude. History suggests equity markets go up more than down, therefore have to make a new high. In our view that is not necessarily a good reason to be bearish.