A month end that saw a sharp correction in the major developed indexes, as we pointed out there had been a few warning signs of a possible setback after a period that has seen the market leaders (mid cap and high yield) starting to under perform. The US indexes taking the brunt of the fall, the dollar strengthening partly to blame. It would appear that last week’s set back was not caused by one event, but the recent collection of events coming together, compounded with a time when investors and traders tend to want to take risk off the table anyway.
The blame appeared to be evenly spread between the European inflation data, the threat of higher interest rates in the US leading to a stronger dollar, brought on by a better than expected 2nd quarter GDP report. Other factors included the continued geopolitical risks as further sanctions were introduced against Russia, and finally yet another default by a Latin American country on its debt obligations.
The earnings season has now passed its peak, particularly in the US, and so far appears to be continuing in a satisfactory manner.
The Vix rose sharply over the week, up from 13 points at the start of the week to 17 by the end. Over the past 2 years, the Vix has traded in a range of 11 to 20; on previous occasions when it has got to 20 enough fear seemed to re-enter the market for the rally to resume. The S&P 500 fell through its 50-day moving average and is now about 3.5% higher than its 200-day average. Should the correction continue into next week, the 200-day moving average is the support level the traders will look for. The FTSE 100 is once again trading on its own 200-day moving average, a level that it has found support from earlier this year. US 10-year treasury yields rose briefly post the GDP report, but as the week ended yields had fallen back to below 2.5%. In the UK 10-year gilt yields have also fallen back to trade at 2.55% from 2.75% a month ago.
The week ahead will be dominated from an economic point of view by Thursday’s rate decisions in the UK and Europe. We would not imagine there is a real expectation for a change in either region, even more so in Europe than the UK. Mario Draghi in the ECB press conference is likely to be questioned once again on the threat of deflation in the euro area. The UK investor will be keen to see if the vote remains at 9-0 for rates to stay where they are, although we will not find out the detail of the votes until later this month. Ahead of Thursday’s rate decision announcement we get UK industrial and manufacturing data. In Europe, the focus ahead of Thursday will probably be on Tuesday as we get the final Markit report for the euro area Purchasing Managers survey. A figure of 54 for July is expected up from 52.8 in June.
As we have said the summer months have a habit of being volatile, whether this correction of the past few days will continue in August, time will tell. This period is one when many of the money managers are on holiday, and as such there will be a reluctance to add to positions, preferring to wait until the summer break is over. This may mean that the correction could continue for a little longer.