China surprises

European markets were boosted on Wednesday by China's quarter-on-quarter GDP report, coming in at 7.5% growth for Q2. Formal expectations were for a figure of 7.4%, but one would suspect that many secretly feared it to be below this, so a beat feels like a double boost. European shares reacted more positively than Asian markets, which provided a more muted response. It is possibly worth noting that the New Zealand dollar, historically considered a "risk on" currency meaning one would expect it to rise on this data, lost ground against the Japanese yen on Wednesday.

A lot of the papers focussed on the prepared speech from Janet Yellen to congress, at the start of her two-day marathon. The conclusions were close to the script delivered over the past months; spare capacity in the economy remains, significant slack remains in the labour market, and asset prices are not in bubble territory (except in some tech and biotech). The net effect seems to continue to dampen expectations of an imminent rate rise.

Merrill Lynch released its latest fund manager survey for July; the findings deliver a mixed message as fund managers cash levels remain high, but asset allocation shows equities at their second highest level in 13 years. Fund managers see one of the greatest risks to asset prices being geopolitical. It is quite possible that geopolitics is the greatest risk to asset prices, with the troubles in Ukraine, Middle East and continued tensions between China and Japan. But it may also go to prove the psychologists’ common held belief that human nature means we worry most about what we see currently making the headlines. Humans, according to Daniel Kahneman (psychologist and Nobel prize winner for economics), believe that when an unlikely event becomes the focus of attention, we will assign it much more weight than its probability deserves.

One other interesting point from the research piece was that despite a strong weighting in equities, fund managers remain underweight UK equities. That could bode well for the performance of UK equities, particularly relative to other major developed markets.

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Posted on July 17, 2014 .