Last week saw a continuation of the rally in the advanced equity markets, assisted by both the Federal Reserve and the Bank of England, who were at pains not to rock the interest rate boat. We wrote this week that with the world being such an indebted place, global economies might not be in a position to deal with higher interest rates. Governments and Central banks constantly try to find a balance between fiscal (taxation) policy and monetary (interest rate) policy as they look to balance the books and control their domestic economy.
Post the financial crisis, interest rates have remained at historic low levels and the tax burden has increased. Wealth creators would like the balance to adjust back in favour of reduced taxation and higher interest rates. It may be going forward, as governments as much as anyone need rates to stay low, whilst at the same time needing assurance of tax receipts to pay the interest burden that this current situation of low rates and higher taxation may remain for more years to come than economists expect.
Aside from the recent strength in sterling the other talking point of the week was the rise in the oil price, caused by renewed tension in the Middle East. Oil price shocks and their effects on global economies, and therefore equity markets, have been well documented over the years. The Mid 1970’s oil embargo, the Iran crisis of the early 80’s, the Iraq war spike of 1991 and the latest one in the mid 2000’s caused by the Middle East revolution are the most notable. The common theme through all the spikes was the start of the rise was uncertainty in the Middle East, and in each case the oil price doubled in short period of time. So far the impact the ISIS insurgents have had on the oil price has been minimal, likewise the impact on equity sentiment.
The weekly round up of investor sentiment; saw a sharp fall in bullish sentiment after the previous week spike, according to the latest AAII retail investor survey. Money flows over the past seven days showed another strong flow of capital into equities, the slight difference this week was it came from bonds as opposed to money market funds. The Bank of America Merrill Lynch Fund manager survey continues to show that cash levels remain stubbornly high at 4.5%. The Vix, having much written about it as it trades near historic lows, closed the week back below 11, having started the week at 12.5 ahead of the Federal Reserve meeting.
The start of the coming week sees the release of the latest Chinese Manufacturing PMI, as the Chinese data has shown more encouraging signs recently, hope will be for the survey data to rise back above 50, indicating once again the economy is in an expansionary mode. On Friday, in Europe we get the industrial and economic sentiment for June, although it’s probably too early to see if the actions of the ECB has had any effect. Not much in the UK apart from on Thursday when we get the release of the final GDP data for the first quarter. The US sees the usual constant flow of data.