A pause for breath

As we turn the corner into what feels like the home stretch, developed equity markets paused for breath in the past five days, after the strong performance of the week before. The Vix index, considered as a tool to indicate the level of stress in financial markets, fell again. The past week’s economic reports were rather likes Goldilocks’ porridge, neither too hot nor too cold. That may be the best out come for equity prices into the year-end. If the porridge gets too hot the market will anticipate rate hikes, too cold and the fear will turn to recession and deflation.


We highlighted the results season as being important for equity markets into the close of the year. This week has been a mixed bag. Wal mart demonstrated along with the latest US retail sales data that despite the benefits of prolonged low interest rates, and the boost from lower oil prices the US consumer is still cautious. Inflation remains below central bank targets with little signs of an uptick.


Not so long ago it seemed that economists feared a global economy that forced central bankers to hold interest rates close to zero, as it would reflect a lack of growth akin to the Japanese economy they for the past 20 years.  Economists now appear to fear a US rise in rates for its impact on the emerging markets.


Looking forward to the week ahead China will come back into focus. Overnight on Sunday we received the latest GDP estimates for the third quarter. Expectations were for the Chinese economy to grow at 6.9% for the past quarter year on year. And that is exactly where the figure came in. Retail sales for the month of September grew at 10.9% year on year, likewise in line with expectations.


After a busy week last week for macro in the US, it’s a quieter week for the week ahead. Janet Yellen speaks on Tuesday at the University at Massachusetts. At the last Federal Reserve meeting Janet Yellen stressed that she felt a rate rise before the year-end was still viable. Two governors this week seemed to indicate that they have reservations, as do we.


For the UK Thursday will be the focus as we get the latest retail sales data, for September. Expectations are for a year on year growth of 3.8%.


Corporate earnings will continue to be in focus; this week we get announcements from amongst others “Big Blue” (IBM) as well as the construction and mining service company Caterpillar. Shares in Caterpillar have been under the cosh after they announced another cut in revenue expectations and job cuts in the summer. Sentiment may have become bearish enough that no further bad news may let the shares bounce.  


The earnings season in Europe is beginning to gather pace, on Wednesday Reckitt Benckiser report, and on Thursday one of the longest serving FTSE 100 companies reporting in GKN. 


Posted on October 19, 2015 .