Another good week for equity investors as all the advanced markets continued to rise, however the FTSE 100 persists in lagging the S&P 500 as well as the FTSE euro first 300. The end of the week also saw the FTSE world index break through its 2007 record high. The Vix closed the week below 11, sparking debates amongst journalists about whether complacency is creeping into equity market investors. The AAII investor sentiment index saw bullish sentiment rise to 39.5, its long-term average, bearish sentiment fell to 22.2 well below its long-term average of 30. A gap of 17pct between the bulls and the bears will grab the contrarians interest but extremes are reached when the gap nears 25pct.
According to Merrill Lynch, for the third straight week bonds saw greater inflows of capital than equities. For the second week running equity investors withdrew capital from equity funds.
The past week was dominated by the measures introduced on Thursday by the ECB. As we pointed out the reaction on the day from investors was fairly muted. The euro finished the week marginally higher than it started it. General consensus amongst analysts seems to be that the ECB went further than many expected, but will still need to go further to have a real impact on the eurozone economy. Spanish 10-year bond yields fell to 2.64% on Friday, after the rise in US treasury yields this week there is now just a 4 basis point gap between the yield on the 10-year Spanish bond and the equivalent US treasury. One has to assume that if banks now have to pay the ECB to deposit money with them, money is being withdrawn from the ECB and invested in peripheral bonds forcing yields lower.
On Friday, the US equity market seemed to be buoyed by the US employment data that recorded more US citizens are now in a job than they were in 2007. Perversely strong employment data can often be seen as a negative for equity markets as it anticipates policy action from the central bank to moderate the economic growth. This data will probably reinforce the expectation that the Federal Reserve will taper its purchase program by another $10bn at its next meeting on June 18th-19th.
The week ahead is a quieter one in terms of US data; China may dominate the headlines a little more. Overnight on Sunday we get Chinese import export data, on Tuesday inflation data, and on Friday year-on-year industrial production growth.
After last week’s expected no change by the Bank of England to base rates and bond purchase program, it is a reasonably busy week in the UK. On Tuesday we get industrial and manufacturing production data, and on Wednesday the latest employment rate announcement with expectations for another fall this time to 6.7% from the previous month’s rate of 6.8%. A greater fall than that will probably see more focus on when the first rate rise will be announced by the Bank of England.