Developed equity markets rose for the fifth consecutive week, continuing to defy the bears. The week was dominated by the two events at the end. The first being the dissection of the ECB’s decision on Thursday to introduce some of the “additional tools” so often referred to by Mario Draghi in his post-announcement press conferences. The bulk of the press commentary seems to be that this goes some way to help stimulate the eurozone economy but not far enough, and full-blown quantitative easing is still inevitable. Our view is that global inflationary pressures are starting to show signs of rising, and as the Fed completes its bond-buying program in October we may be close to the high point in the liquidity cycle.
The second event that dominated the weekend headlines was Friday’s weaker than expected US payroll data. Despite the generally improving picture for the US economy, the jobs report that showed fewer jobs were created than expected in August. This report appeared to reinforce the views that any move to raise US interest rates will not take place before the middle of 2015.
With our weekly look back at any changes in investor sentiment we see a lot of focus on the fact that September can often be a difficult month for equity markets. As we are now over 500 days since the last 10% correction in the S&P 500, against a long term average of just over 120 days, speculation continues to run as to when this correction might happen. Our belief remains that whilst investors continue to fear the setback it is less likely to occur. Equities and bonds funds saw inflows in the past week; bonds continue to have attracted more capital this year than equities. Despite the odd spike in the past 5 days the vix remained close to historic lows, indicating continued confidence that equity market run can continue for a while yet. The AAII investor survey showed bullish sentiment pulled back a little of the previous weeks spike.
The week ahead, after last week’s excitement, is less eventful. The UK will continue to be dominated by opinion polls regarding the upcoming Scottish vote for independence. Recent polls have shown a resurgence in the yes camp, this has led to the papers focusing on the impact this may have on the UK economy. Ahead of an event such as this one can always find “experts” providing the dire consequences these events may lead to. Yes or no, one gets the sense that the consequence of the referendum will lead to changes in the status quo between Scotland and the rest of the UK in the coming years.
On the macro front, the state of the Chinese economy may be the focus of the week as we get import export data on Monday, and inflation data on Thursday.