More bricks for the wall of worry

The announcement by the Federal Reserve that it had left interest rates unchanged, was anticipated, what was of more interest was the accompanying briefing from Janet Yellen, the Federal Reserve chairman. At the start of the briefing the chair downgraded its forecast for US economic growth for this year from 2.5% to 1.9%. After the weak start to the year this forecast implies that the Fed expects the economy to grow at 2.8% for the remainder of the year. Capital markets are apparently split about half and half as to the prospect of the first rate hike occurring in September this year, and then the expectation is for one more rise before the year end. Equities in the US rallied after the press meeting, as did the bond market, investors taking the view that Janet Yellen remained opened minded about when the Fed will move. Two-year yields fell from 75bp ahead of the meeting to 64bp post the meeting; this is considered the maturity most sensitive to changes in interest rate sentiment.

Wednesday also saw the release of the minutes of the last Bank of England's rate-setting meeting. The vote remained at 9-0 for no change; a couple of members were reported to be erring towards voting for a rate rise. Equities in the UK continued to drift on Thursday initially, at one stage the FTSE 100 looked like falling for the 8th day out of the last 10. A stronger opening in the US helped UK equities recover as the day wore on. The FTSE 100 is now almost 2% lower than it was this time last year, in absolute terms. The euphoria of a Conservative election victory is now long gone.

Greece remains in focus as investors now view it, as an even money chance Greece will leave the euro. Press speculation late on Thursday suggested that Greece might not open its banks on Monday morning. Whatever the outcome one has to take the view that long term investment decisions are not based on Greece’s participation in the euro. Crisis’s come and goes, one has to remember that when and if they come, along with it comes opportunity.

It is hard to get accurate trading volume data, but it appears that trading volumes have not picked up as the equity markets have been drifting lower. It would appear for choice that FTSE 100 volumes have been tailing off with equity prices. This would suggest that selling pressure but an absence of buying does not create the fall. Those who sold in May and went away are looking smug at present, though who will sell when they look to return is another point which may make reinvesting a tricky decision. 

Posted on June 19, 2015 .