A week that ended, despite all the geopolitical risk, with the S&P 500 slightly higher at the end than at the start. The same cannot be said for the FTSE 100, European indexes or the Nikkei 225 of leading Japanese shares. After the recent correction in developed markets, in contrast, China has now entered the territory of bull market, as the recent rally has pushed some indexes more than 20% higher. UK companies continue to complain about the impact of sterling as companies like Amec highlight what the recent strength has had on its profits. It will be interesting to see, if and when the pound reverts from current levels giving profits a boost, whether CEOs are quite as forthcoming with their comments. Europe was once again hit by concerns that the economic recovery could be wavering as the spectre of deflation remains and Italy’s economy in particular continues to struggle. The Dax index of leading German companies has been hit in particular recently giving back about10%. Concerns about the impact sanctions may have on the economy, has led to this bout of profit-taking. The Dax, like the S&P 500, has been one of the best performing indexes over the past year so this is not entirely surprising.
As always, with our look back at the past week, we try and judge where sentiment is currently. The recent sell off in high yield credit has been making plenty of headlines, this week has seen some signs of capitulation as $11.4bn came out of HY funds, likewise developed equities saw big outflows as $20bn was withdrawn. The AAII weekly investor sentiment reported on Thursday that 38% of individual investors think the market will be lower in 6 months time against 30% expecting it to be higher. The Vix fell on Friday to leave it lower on the week. One does get the sense that a little fear took over greed this week, which may be an encouraging sign for the weeks ahead. Bonds continue to be well bid as yields on US 10-year treasuries fell to 2.42%.
As we look to the week ahead, the majority of the reporting season in the US and Europe the pretty much complete. Overall the US was possibly slightly more reassuring than Europe; the common theme from both regions was earnings beats outstripped revenue beats. So it’s back to good old macro, Wednesday will probably considered the big day as we get economic data from most of the regions around the globe. Japan’s Q2 GDP, Chinese industrial production for July, French and German consumer price inflation. Wednesday is a particularly busy day for the UK as we get 3-month and year-on-year average earnings, June unemployment rate; expectations are for it to come in at 6.4%, along with the latest Bank of England inflation report. That combination of data will once again have economist’s reassessing their interest rate expectations.