Another decent week for equity investors as global stock markets continued to climb the wall of worry, the bricks of which came mainly from the continuing debate over the fate of Greece and the euro. The ongoing situation with regard to the Ukraine seems to be causing less in the way of concerns at present. This was another week where cyclical names outperformed the more defensive ones. A modest dip in oil prices over the week did not appear to shake equity markets. Equities in the US were boosted on Friday evening by hopes that a deal had been reached over Greeks debt position, but weekend reports suggest that despite encouraging signs all is not yet finalized.
The minutes from the last Federal Reserve meeting continued to suggest the Fed remain open minded about raising rates at this point in time. In our outlook for the year ahead we felt that greed was in bonds and fear in equities and this appears to be reflected in the performance of both asset classes as bonds are having a poor start to the year. Bond investors have had a particularly poor February, 10 year US treasury yields have risen from 1.68% at the start of the month to close Friday at 2.13%. 2-year yields (considered the best indicator of interest rate expectations) have risen from 49bp at the start of the month to close on Friday at 67bp.
Last year we took the view that a rate rise was unlikely in 2014 and so it proved, the likelihood now that we have one in the US in the coming months grows stronger by every day. The announcement that Wal-Mart stores have raised base salaries by 37% won’t go unnoticed by Janet Yellen.
The week ahead will continue to be dominated by events with Greece, as an agreement needs to found by the end of the month. The other event that will make headlines in the week will be the speech on Wednesday evening from the Federal Reserve Chairperson Janet Yellen, as she delivers her semiannual monetary report to congress. This could well be the moment that the Fed starts to prepare markets for the first move on interest rates, possibly ahead of June as investors currently expect. It appears to be a week of Central Bank speeches as Mario Draghi speaks on the occasion of unveiling of the new 20-euro note. This speech is unlikely to cause many ripples, aside from perhaps some thoughts as to the current situation regarding Greece.
China returns from the end of the New Year celebrations, and as market analysts continue to debate the state of the Chinese economy HSBC release on Wednesday their estimate of manufacturing PMI. A slight tick up from last month’s 49.5 is expected, but estimates are for the number to remain below 50 indicating a continued contraction in the manufacturing base.