Equities finished the past week on a strong note, a combination of an improving reporting season, better than expected economic data from the euro area on Friday, hopes of a peace agreement in the Ukraine and finally expectations that a resolution may be found for the Greek economy, encouraging investors. The Vix fell below 15, as the fear of a few weeks ago has been replaced with hope for the year ahead. Results from the mining company Rio’s on Thursday helped the FTSE 100 push on, as did some speculation in the Wall Street Journal that BP could be a target for Exxon. Should the sentiment towards the resource sector continue to improve, it may not be too long before the FTSE 100 finally breaks the 7000 barrier. Mark Carney’s comments that accompanied the BofE inflation report, where he mentioned the possibility of rates falling even further post the deflationary impact of the falling oil price, added to the positive sentiment.
The weekly fund flow data continues to show money flowing into bonds and equities, but at $11bn, bond fund inflows outpaced equity inflows. Ten-year treasury yields rose during the week and are now back over 2%. Despite the better than expected growth data from Germany on Friday, 10 year bund yields remain close to historic lows, currently yielding 34bp. Swiss ten year bonds now yield -0.01%. Greek 10 year yields fell back below 9%, and although the yield on the five-year Greek bond fell on the week, 5year yields at 13.4% remain higher than the ten year.
The week ahead will probably be dominated by the ongoing negotiations to find an agreement with regard to Greece. Aside from that on Wednesday we see the release of the minutes from the last FOMC meeting. Speculation in the past week has brought expectations for a rate rise in the US forward from September to June this year, it will be interesting to see after Mark Carney’s comments this week how the FOMC have been influenced by the recent fall in the oil price.
As far as the UK goes on Tuesday we get the year on year inflation data, expectations are for a further fall in the headline rate. At this point we are willing to speculate that as the deflationary impact of the fall in the oil price wears off this may well be the low point in UK inflation, and that as the benefit comes through to the consumer headline inflation will start to pick up.