Another week has passed that saw the FTSE 100 underperform relative to the other major developed indices as it ended the week at 6775, down 1.17%. Mark Carney in his Mansion House address, who has been at great pains to reassure investors that interest rates will not be rising in the near future, now believes the first rate rise may come sooner than expected. The gilt markets reaction to the speech has so far been relatively muted. 10-year gilt yields rose 8bp on the week to stand at 2.75%. The sharpest rise in yields, particularly in relative terms has been 2-3 years out. The yield on a 3-year maturing gilt has risen to 1.26% up from 1.03% a month ago and 1.08% a week ago.
The other development that rightly caused some uncertainty this week was the resurgence of unrest in the Middle East. The oil price spiked to a 9-month high with Brent crude rising 3% to $113 a barrel due supply fears. If there is one thing that central bankers fear could derail a global economic recovery, it is a sharp rise in the oil price.
Briefly covering the sentiment indicators of the past week, the AAII index that polls retail investors on their outlook for the market in the coming 6 months, and which we often refer to, saw bullish sentiment rise to 44.7%. The gap between the bulls and the bears is now 25%. To reinforce the apparent change in sentiment for equity investors last weeks fund flow data saw the strongest weekly inflows into equities since February of this year. The Vix, after much was made of its fall to new lows, rose to close the week at 12.2 points. The increase in bullish sentiment, along with the situation in the Middle East and the higher inflows into equities may signal a temporary pause in the upward move.
The main event of the week ahead, aside from the usual flow of economic indicators, will be the 2 day meeting of the Federal Reserve on Tuesday and Wednesday, culminating in the announcement of the Federal Reserve’s latest interest rate decision. One does have to wonder that since the ECB appear to be more willing to be proactive in terms of monetary stimulus, if this may be behind Mark Carney’s apparent change of heart, and whether it may have a similar impact on the Fed. No one is expecting any change to US interest rates on Wednesday or a change to its policy of tapering by $10bn dollars a month. There is though the possibility that the Fed could echo the comments from the governor of the Bank of England by signalling the first rate rise may be sooner than anticipated.
Tuesday sees a report of the latest inflation data in the UK and US; any rise above expectations will probably influence interest rate sentiment. The recent rise in the oil price will not have fed into these reports but a continued rise will start to do so. This may in turn force central bankers hands more quickly than the market anticipates.