At the end of last week we felt the rally in equities that took place post the Federal Reserve's interest rate announcement and accompanying statement, along with the comments from the MPC was largely caused by short covering as traders were taken by surprise at the dovish nature of both statements. As equities gave up all of those gains, it would appear that our conclusions were probably fairly close to the truth. The developed markets of Europe, UK and the US fell in line with each other, all closing down around 2% on the week. The US durable goods orders report on Wednesday coming in below expectations did not help investor sentiment. As we come up to the end of the first quarter, equities have been the best performing asset class so far in 2015 compared to bonds, commodities and cash.
Possible profit taking ahead of end of the quarter saw net outflows from equities and inflows into cash and investment grade bonds; the bulk of the outflows came from US equities. A lot has been written about investors turning to exchange traded funds and away from traditional fund managers as fees and performance has not matched expectations. A reflection of this can be seen from the fund flow data, year to date long only funds have lost of $20bn and in contrast exchange traded funds have attracted over $40bn of new capital. The Vix rose on the week to close just above 15. The oil price spiked higher during the week on increased Middle East tensions but lost ground again on Friday. The recent sell off in the US dollar halted during the past week, closing on Friday approximately where it started on Monday.
The week ahead for the US will be focused on the ADP employment change report. With continued speculation as to when the Fed will look to raise rates, a stronger than expected number may add to the view the first rise will come in June. Also on Wednesday the latest ISM manufacturing PMI estimate for March gets released.
For the UK we get the final Q4 reading GDP for 2014 on Tuesday. Post last weeks TV debates the upcoming election will start to dominate the news headlines. Bookies continue to forecast a small majority for the conservatives, opinion polls will be released almost daily over the next month and one can only expect this upcoming uncertainty as to the outcome will cause some nervousness in UK equity and possibly bond markets as well.
For Europe aside from the ongoing negotiations regarding Greece, Tuesday’s inflation and employment data for the area will be of interest to investors. Analyst expectations are for no real improvement in inflation or employment in the region despite the start of the ECB’s quantitative easing program.
The markets will waken on Monday to the latest manufacturing data from China for March; analysts expect the index to climb above 50 again. A weaker than expected number will probably add to expectations of more monetary easing from the Bank of China