Equity markets started the week in a robust fashion ahead of the monthly two-day rate setting Federal Open Market Committee meeting and the budget. Opinions remain split as to whether the Fed will remove the word patient from the statement, there by encouraging the capital markets to prepare for the first rate rise in June as opposed to September, or be rather more influenced by the recent mixed economic data and leave the word in. Later all will be revealed.
Merrill Lynch released its latest European fund manager survey; the report suggests bullish sentiment on European equities, which had become stretched last month, in their words, is becoming more stretched. Investors are obviously extrapolating what happened in the US to risk assets during periods of quantitative easing and taken the view the same will happen in Europe. We have pointed out that the potential for earnings recovery for European companies is high due to the level they are relative to 7 years ago, but it is important to see this earnings growth starting to come through to justify this bullish view. It would also appear from the survey that fund managers fears of a few months ago, of outright deflation in Europe are subsiding. The global survey shows a strong shift towards banks and materials. The recent move higher in bond yields obviously being an influence for that shift in sentiment. Despite the improving attitude to the materials sector fund managers appear happy to remain under weight UK equities, probably keeping one eye on the upcoming general election.
As the price of oil moves back towards the lows of earlier in the year, we see how sentiment can change to the same event. At the start of the year the falling oil price was seen as a proxy for global growth and hence had a very negative impact on risk assets. Slowly but surely the focus has moved from its possible reflection on the global economy, to taking the more positive view on the longer term boost lower raw material prices will have on the consumer and corporations alike and hence future global growth.
If ever there was a perfect lesson of how one should buy when sentiment is low, today's German ZEW economic sentiment survey clearly demonstrates the point. In October last year we pointed out how sentiment in Europe had fallen back to levels seen in 2012, just before Mario Draghi made his famous do anything speech. Tuesday saw the latest release of the sentiment survey and since that low point in October coinciding with the low point in the European equities, sentiment has now risen to the same level it was this time last year. Likewise the equity market in Europe has risen over 20pct in the past 6 months. As we have also seen from Merrill's survey today investor sentiment towards Europe is very stretched on the bullish side. Those who bought when fear was abundant may be concerned that greed is taking a firmer hand.