Last week saw equities resume their ascent after a couple of weeks pausing for breath. On Thursday US equities climbed again to new highs, post the payroll data showing the unemployment level falling to 6.1%. The unemployment rate has now fallen from 6.7% to its current level so far year to date, and despite this fall, the reaction from the bond market has been very muted. 10-year US treasury yields have risen modestly in recent weeks now standing at 2.64%, but remain lower than where they started the year. Falling employment levels traditionally have a negative impact on bonds, as it’s a sign of an expanding economy and therefore the possibility of a tighter monetary policy. The lack of reaction from the bond market to the improving employment scene, and the recent uptick in US inflation data remains something of an anomaly.
As the financial press continues to debate the likelihood of an equity market correction, we take our weekly look at investment sentiment to look for clues. The previous week saw equity inflows pause, but the past week saw inflows into equities resume in a modest way. Bonds continue to see inflows, as did commodity funds. The AAII weekly survey, we often refer to, saw a modest uptick in bullish and bearish sentiment. The gap between the bulls and the bears remains around 17%, and continues to be below the 25% that contrarians look for to indicate a market correction. The Vix fell again on the week, closing just above 10 points.
As the schools break up we enter, what has been for three of the past four years, an indifferent time for equity markets; August in particular is noted for its volatility. Tuesday sees the start of the earnings season as Alcoa, the traditional bell weather for the season ahead, reports after hours. For those who are newer to our articles, Alcoa is a global producer of aluminum, and as the metal is integral to many consumer items its earnings are seen as a lead indicator for those companies it precedes. The aluminum price has risen so far this year, and on the back of that Alcoa shares have done well, having risen from just below $11 at the start of the year to nearly $15 at the market close on Thursday.
The U.S. economy has had, as we know, a mixed start to the year; analysts will be keenly waiting to see what sort of impact this will have had on corporates’ second quarter earnings, as well as their outlook for the rest of the year. Morgan Stanley in their pre-earnings season review noted that expectations ahead of the second quarter have been revised downwards, making it easier for expectations to be met or possibly beaten. The main macro event of the week will be the release of last month’s Federal Open Market Committee meeting minutes on Wednesday in which analysts will be looking for any doves becoming more hawkish and visa versa. In the UK we hear the latest rate decision from the Bank of England on Thursday, there are no expectations of change in base rates. What will be of more interest is whether any members of the MPC were prepared to vote in favour of a rate rise at the meeting.