We often discuss how fickle sentiment can be on equity markets. The developed equity markets of America, UK and Europe have all rallied approximately 10% from the lows of mid September. They do however remain below the heights from earlier in the year. The reason for the sell-off, the US would raise rates just as the fears were growing of a Chinese economic hard landing leading to a global economic recession, are well documented.
These fears appear to have subsided for now, the US did not raise interest rates, the Chinese economy may be slowing but perhaps not as fast as feared and this week Mario Draghi intimated that the ECB might add further stimulus. The bears will continue to argue their case, however the equity market picture remains finely balanced.
Equity markets were not the only risk asset class to have a good week. High yield debt saw inflows with the performance positive as risk outperformed quality. The top performing asset classes were emerging market equity followed by US high yield.
The big move in the currency market was post the ECB meeting on Thursday as the euro weakened about 3%. The question is now has this move by the ECB strengthened the case for a rate rise by the Fed in December or weakened it? On the one hand it could be said the ECB have done the Fed’s work as the dollar rallied, on the other the additional liquidity the ECB could provide may soften the blow any move the Fed might make.
We have covered earnings in our mid week blogs, the picture was improved at the end of the week by Microsoft, Amazon and Google after the disappointment of Caterpillar. Factset records that with about one third of the S&P 500 companies having reported, the blended earnings decline is 3.8%, slightly ahead of expectations.
Looking to the week ahead earnings will remain in focus, as more blue chips will report. BATS, BP, Comcast and Ford on Tuesday will make some headlines.
Macro will be dominated on Tuesday by the US durable goods orders data for September, as well as the latest consumer confidence report. Wednesday will be the big day as the Federal Reserve decides whether the timing is now right to move on interest rates. A move this week would definitely take the markets by surprise. On Thursday q3 GDP for the US economy, expectations are for the economy to grow by 2.5% for the third quarter year on year. Likewise on Tuesday we get the preliminary estimates for UK Q3 GDP, expectations are similar for a similar growth number than that of the US, around 2.5%. For Europe the focus will probably be Thursday and Friday. Thursday we get business and consumer confidence as well as economic sentiment. On Friday we get the latest employment and inflation rate for the eurozone, these figures may have some bearing on what the ECB do in September.