Another decent week for equity markets, as central bankers continue to suggest simulative monetary policies will remain in place for a while yet. The continued weakness in Chinese data this week added to speculation that the Bank of China will further ease monetary policy. Mario Draghi suggested that the ECB would pick up the bond-buying program in the month of May and June to make up for the lack of Liquidity in the summer months. The minutes from the latest Federal Open Market rate setting meeting, almost ruled out a June US rate rise and on Friday Janet Yellen remained vague about when she believes the first rate rise will take place, adding she expects it to be some time this year.
10 US treasury yields rose modestly on Friday having stabilized in the month of May. Likewise 10 year gilt yields have stabilized just below 2%. The latest fund flow data indicates that the much-vaunted switch from bonds to equities is yet to take place. Year to date bond funds have seen inflows of over $100bn dollars, equities funds on the other hand have seen outflows of just over $15bn.
The Vix index fell modestly on the week suggesting investors remain optimistic for equity prices in the short term at least. The AAII weekly investor sentiment index reports retail investors continue to be neither bullish nor bearish for stocks for the months ahead. We remarked a few weeks ago on an FT article suggesting fund managers have been running higher than normal levels of liquidity, anticipating the next market correction. If equity prices do continue to creep higher, these fund managers will be faced with difficult decisions. It is striking how so many fund managers agree market timing is the hardest thing to gauge; yet they constantly try and practice the art.
Looking to the week ahead, in the UK it’s the Queens speech on Wednesday, which cover a wide range of topics. It will be interesting to see now that the Conservatives are free from the shackles of the Liberals, how they use this new freedom, hopes firstly will be for a more liberal fiscal policy. The proposed EU referendum will continue to dominate headlines one would expect. On Thursday we get the 2nd quarter estimate for UK GDP, forecasts are for a modest quarter on quarter growth rate of 0.3%.
The US sees a raft of data in the coming week, Tuesday is a particularly busy day foe analysts. We get durable goods orders, house price data, and the results of May’s flash Markitt Purchasing Managers reports, and a speech from a Federal Committee member.
It’s a quieter week in Europe; except for Thursday we get economic sentiment and consumer confidence reports. We also get the results of the bi annual ECB financial stability review. The financial stability review assesses possible areas of risk and vulnerability to financial stability within the region.