Many newspapers predicted the worst for equity prices on Monday morning after the tragic events of Friday night in Paris, as it turned out after an initial sell down equities recovered, particularly in Europe. There is no doubt that having the weekend to allow people to digest the news may have prevented a more volatile reaction.
Part of the explanation for the muted reaction from stock prices could be that the increase in terror threats will encourage the Fed to not move on rates and increase the likelihood the ECB will add further stimulus measures. It may also be that after a poor week last week equities were recovering from the oversold levels.
The latest Merrill Lynch global fund manager survey reports a fall in fund manager cash relative to recent levels but remains above historical lows. Sentiment remains very bearish on emerging markets with positioning at all-time high of developed markets over emerging. Relative to history, commodities, materials and energy remain the most unloved stocks. “Risk stocks” came out worst in the euro area reporting season. If equities are to push higher one has to expect the sentiment for the more economically sensitive sectors to recover.
The survey also records that over 81% of fund managers expect the Fed to hike in December, the report was probably taken before the events of Friday. Tuesday’s US inflation data reported that inflation rose 0.2% month on month slightly ahead of expectations. Should the Federal Reserve not act in December it may well be taken more negatively by equity markets, as investors have appeared to discounted the event.
Despite improving real wages in the UK and a pick-up in consumer spending, UK consumer price index remained at -0.1% for the month of October.
We have written over the past weeks how market sentiment appears to change almost on a daily basis. The bears continue to believe the rally in stocks is not justified based on the macro fundamentals, alongside emerging market fears. The bulls look to modest real economic growth alongside accommodative liquidity policies, which is unlikely to change much even if the Fed to act. On any given day who has the upper hand seems to alter.
The Chinese economy continues to influence sentiment, overnight on Tuesday there was a modest piece of positive news as the Chinese government reported a year on year uptick in house prices.