Another decent week for developed equities, even if the month finished on a muted note. The S&P 500 managed to hang onto the 2000 level and the FTSE 100 closed just above 6800. Friday saw the latest report of the euro area’s employment and inflation data. The unemployment rate came in at 11.5%, in line with analyst expectations. Core inflation (excluding food and energy) came in slightly higher than analysts predicted at 0.9%. We did anticipate that these reports may come in slightly better than expectations, in the end they came in no worse.
The troubles between Russia, Ukraine and the rest of Europe, which has shown no signs of improving, but has recently been largely ignored by equity investors, may once again come to the forefront as the European leaders met over the weekend to discuss further Russian sanctions. The Brent crude oil price bounced slightly on Friday, but remains close to the recent lows. The FTSE 100 may also be impacted by the news that more conservative ministers are contemplating moving to UKIP.
Our weekly look at investor sentiment shows retail investors just about as bullish as they have been in the past 5 years, according to the AAII weekly survey. Equity and bond funds continued to attract capital this week; investment grade bonds saw the bulk of the flow, but for the second week running high yield attracted investment. Bond yields in the US and Europe continue to fall, German 10-year yields have now fallen below 0.9%, Spanish 10-year bonds now yield only 2.23%. The continued fall in European yields is considered another sign that investors are preparing for imminent action from the ECB. This fall in European yields along with the continued worries over the Ukraine situation seems to be driving US treasury yields lower as the 10-year yield fell to 2.34%. The recent rise in the US dollar continued in the past week as equity, bond and currency markets once again moved higher in tandem.
The week ahead is a busy one for economic data, but the main focus will again be on Europe as the ECB announce the latest rate decision on Thursday. Reports that the ECB have appointed BlackRock to study ways that the Central Bank may start to introduce quantitative easing, has only added to the speculation that they are on the cusp of introducing further measures. Monday morning will focus on China’s August Manufacturing data. Last month's survey came in just above 50, considered as showing an expanding economy, and expectations are for a small improvement from that number. On Thursday we also get the UK monthly rate decision, despite last month's Bank of England minutes reporting that two members of the committee voted for a rate rise, expectations remain for no change to interest rates. In the US it is a slightly truncated week as equity markets shut on Monday for Labor Day. Friday’s employment data will probably be the focus as economists continue to speculate on interest rates moves in that region.