A mixed bag for equity markets last week as all the developed markets finished the week lower than they started. The S&P 500, as is the case more often than not, was the best of the bunch despite the unexpected weaker reading for Q2 GDP growth. The FTSE 100 did appear on Friday to bounce off its 200 day moving average. As we enter July we approach the next company earnings season, while the Federal Reserve continues to withdraw liquidity, it will be keen to see corporate earnings take up the slack. Ahead of the season opener Alcoa on the 8th of July, last week DuPont, one of the worlds leading chemical companies reduced profit forecasts for the full year. Wall Street shrugged the earnings downgrade off, probably as it was linked to one specific area, namely agriculture. Analysts will hope for better things from the other blue chip companies over the next few weeks.
Bond yields fell on the week; 10-year treasury yields back to 2.53%, and UK gilts to 2.64%. The FTSE 100 according to the FT currently yields 3.2%, whilst one can receive an income advantage owning blue chip FTSE companies over UK gilts, unless one is very pessimistic on earnings outlook, it seems very hard to get overly bearish on UK equities. European peripheral bonds remain in demand, as Spanish and Italian 10-year yields remain well below 3%.
Our weekly review of AAII investor sentiment index saw a slight increase in bullish expectations. The difference between bulls and bears remains modestly elevated, but continues below the extremes that some investors look to as a contra market indicator. Equity flows were pretty flat in the past week according to Merrill Lynch; bond markets saw slightly more significant inflows. Commodity markets saw the first inflows for 4 weeks. The oil price fell slightly on the week, Brent crude closing at $113.5. The Vix jockeyed around during the week, finishing just above 11, remaining close to its historic lows. There continues to be limited signs of capitulation from fund managers as cash levels remain at elevated levels.
The coming week will see China report June’s manufacturing Purchasing Managers Index, investors will as before hope the recent improvement in economic data from that region continues. Monday sees the release of June’s euro area inflation report, last month saw the year on year inflation rate for the region fall to 0.5%, expectations are for a similar report this month. With one day of the 2nd quarter left, global equity markets have risen 4.6% year to date.