Equity markets continue to drift, as do bond proces

Stock markets, particularly those across Europe continue to drift lower with each day. Equity markets in America, at present, seem to be taking the move in bond prices far better than those this side of the Atlantic. US equities have also so far fared better than some of the other macro indicators, for example Dow transport index, down 7% year to date. High yield credit markets have taken a knock in the past month, not unexpected with the move in the treasury market; the high yield index is back to where it started the year. The US dollar continues to lose ground against its basket of currencies. The weaker dollar has not helped commodity prices recover particularly.

The FTSE 100 index has given up just over 5% from its recent peak of around a month ago, the index now sits close to its 200-day moving average. The S&P 500 has performed a little better giving up approximately 2.5% from its recent all time highs. Having now broken its 50-day average, it remains about a percentage point above its 200-day average. The Russell 2000 index of smaller companies encouragingly remains close to its highs.

The recent US economic data has picked up, particularly the employment numbers bringing the possibility of the Federal Reserve acting before September, not something we believe will be the case.

The fall in equity prices has been a little more orderly than that of bonds, as investors seem happy to let equity prices drift without any real sings of panic yet. The Vix index, generally used as a signal for market sentiment, at just over 14, continues to trade towards the bottom end of its long-term range. This is either a sign of confidence in capital markets or a sign of complacency. According to Marketwatch, the other signal of investor sentiment, the put call ratio is not showing signs of extreme bullish or bearish sentiment.

We have written about the anecdotal evidence that suggests fund managers have remained positive on equities, but have recently been taking capital out of equities, so far they appear to be biding their time before stepping back in.

Economic data in the US on Tuesday again painted a more encouraging picture of the US economy as job opening surged to a record high and small business confidence gained in May. The better tone was reinforced by other data showing a rise in wholesale inventories.

Improving economic outlook and rising yields should bode well for equity prices in the long term, as it should demonstrate a growing economy. As always equity markets need time to adjust to higher yields, and the summer months on this occasion may be the time for this to occur. 

Posted on June 9, 2015 .