Another volatile week for equity markets, at the end of which the S&P 500 closed back at record highs, after a strong rally on Friday, as bond prices also recovered. US equities held up despite US economic data continuing to disappoint. The latest of which was Friday’s Michigan Consumer Confidence report. The FTSE 100 lost just over 1% in the past five days, a pull back after the euphoria from the previous weeks election result. The FTSE 250 index of mid cap companies finished the week slightly higher than where it started.
Equities saw modest inflows in the past week, but this was mainly concentrated on Japanese equities. US equities saw slight in flows compared to Europe, which saw tiny outflows. The spike in US treasury yields over previous weeks, which analysts were attributing to the recent weakness in equities reversed this week. US 10-year yields fell back from a recent high of 2.28%, to close the week at 2.14%. Two-year yields, considered to be the most sensitive to changes in interest rate sentiment, likewise fell back, closing the week at 0.55bp. Sentiment looks like its moving back out to September for the first US rate rise.
The Vix fell on the week, closing at 12.35, looking at other indicators of market sentiment, the put call ratio is in the middle of its range. High yield corporate bonds have held up reasonably well from the start of the year. The Dow Jones transport index, which can be a lead indicator for equity prices is now lower than what it was at the start of the year. The weekly AAII investor sentiment index indicates retail investors are neither bullish nor bearish, as the majority expects equity prices to trade sideways in the coming 6 months.
Looking to the week ahead, Federal Reserve member Charles Evans speaks later in the day, he may well reiterate the view made on CNBC at the end of last week that he feels there is no hurry to raise US interest rates this year. On Wednesday we get the latest release of the Federal Reserve’s last interest rate setting meeting. On Friday the latest US inflation data, expectations are for a month on month increase of 0.2%. If the figure came in flat month on month one suspects, the market would not be completely surprised.
For the UK it’s a similar week as the latest inflation data is released on Tuesday,. There is speculation in the Sunday times that for the first time in 55 years the UK economy could briefly experience deflation. In one sense deflation could be seen as bullish for equities, as it boosts the real return from the dividend yield. Wednesday sees the release of the latest MPC minutes; one would expect the vote for a rate rise to have stayed at 9-0 against.
As for Europe Greece will probably cause a few headlines, after last weeks fudge preventing the Greek government defaulting to the IMF. On Tuesday we also get the lasted euro area inflation data for April. We also get the latest ZEW sentiment index, from the lows of last October sentiment has improved significantly,