Equity markets continued to rally last week, the S&P 500 rising for the 6th week out of 7, hitting a new record on Thursday. Investors appeared to take heart from the Federal Reserve keeping the phrase “considerable time” in their post rate announcement policy statement. Equities overall were boosted by not only by the Fed’s comments but also by the Bank of China adding liquidity into its banking system. Equities on Friday did appear to run out of steam, as the day wore on, after the initial euphoria from the Scottish no vote.
The announcement of the limited take up of the ECB’s TLRTO appears to have encouraged the view that the ECB will move to full QE. Our view remains that the situation in Europe would have to get extremely dire for the ECB to make this move, firstly because Germany would oppose it and secondly it is not nearly as simple an operation as it was for the Federal Reserve.
Treasury and Gilt yields closed the week approximately where they started them just below 2.6%, yields having risen earlier in the week. European peripheral bond yields remain close to the recent lows. The US dollar’s recent rise, which has been put down to expectations that the Federal Reserve were considering bringing forward the date for the first interest rate move, held those gains despite the policy statement appearing to dampen that speculation. The strength in the US dollar continues to impact the commodity markets as gold fell to $1215 an ounce. This level has provided support in the past year; time will tell if it does the same again this time.
Looking back over the past week there seems to be little change in investor sentiment. The vix fell modestly on the week, the AAII weekly investor sentiment survey reported a small pick up in bullish sentiment, but remains below that of a couple of weeks ago. Concerns over the outcome of the Scottish vote led to outflows from European equity funds, overall though equity funds saw inflows, the bulk of which were in US equities. Investment grade bonds continue to see inflows despite the recent rise in yields; high yield in contrast continues to see out flows. The latest Merrill Lynch fund manager survey revealed that fund managers continue to hang on to cash.
After an eventful last week, which included the listing of Alibaba, the third largest floatation in history, and further corporate activity in the brewery sector the coming week will be quieter. On Tuesday we get research house Markit’s euro area flash purchasing mangers index for manufacturing, service and the composite of the two. As is always the case in the US there is a continual flow of data, Markit’s manufacturing report on Tuesday followed by durable goods orders and jobless data on Thursday will probably take the focus.