The Week Ahead

Another week passes that sees the major developed markets end the week approximately where they started them. The S&P 500 touched 1900 for the first time before retreating to close the week at 1877, while the FTSE 100 tried to break 6900 again and just failed closing the week at 6855. The FTSE 250 index had a poor day on Friday, down 1.4%, completing a fall of 3% on the week. The NASDAQ index stabilised on Friday, still down modestly on the week, remaining down on the year. 

Hedge funds appear not to have been prepared for the rotation out of the high beta stocks, according to Citi, equity hedge funds are down 3% since March. The first time they have lost money for 3 consecutive months in a rising market. 

The week was dominated more by the events in the bond market. Peripheral bonds fell after the weaker than expected economic growth data. In contrast German bonds were bid up as the yield on the 10-year German bond fell to 1.3%. 10-year US treasury yields also fell closing the week at 2.52%. Once again it appears that US investors were tempted with the attractions of bonds and equities. 

A lot of the weekend press was dominated by the comments on Wednesday from Mark Carney, the Governor of the Bank of England, as contrary to expectations he played down the likelihood of an imminent interest rate rise in the UK. These comments weakened sterling and attracted buyers of UK gilts. 

Just as the Financial Times is running a special entitled “How the euro was saved”, Europe seems to be finding itself the headlines again. The Sunday Times speculated the ECB might be planning a €200bn stimulus package to stave of the current of mixture of anaemic growth and disinflationary pressures. The Sunday Times concluded this figure might be a tad disappointing to investors, and when one compares it to the BofE and Federal Reserves stimulus packages over the past 18 months, and to the size of the eurozone economy (approx. $16tn) one has to wonder how much an effect it will have. The test will come in the currency markets; the euro has weakened recently against the US dollar after Mario Draghi’s comments at the last ECB meeting, expectations the stimulus package will fall short might see the euro recover, something the ECB will want to avoid. 

The week ahead will be dominated by the EU Parliament elections commencing on the 22nd of May. On Tuesday UK inflation data, which will be of renewed interest after Mark Carney’s comments last week, will be followed by the release on Wednesday of the Bank of England MPC minutes and Federal Open Market Committee minutes. These releases may give a clue of any dissenters to both central banks publicly stated interest rate policy. 

The last point worth noting, according to David Smith of the Sunday Times, interest rates in the UK have not been as low as this since 1694, just over 15 years later an event in history known as the South Sea Bubble occurred.

Posted on May 19, 2014 .