A week and month to test investors nerves

At the close of business a week last Monday no one would have predicted that the leading indexes of Europe, US and the UK would have finished marginally higher by Friday’s close than where they started the week. Despite this August was a poor month for equity investors, as the Ftse 100 lost over 6% in the month. Comments from New York New York Federal Reserve member Dudley suggesting that the recent volatility in equity markets makes the next rate decision less clear. These comments along with the Chinese Central Bank cutting rates again helping equity prices stabilise. Commodity prices also rallied sharply at the latter end of the week, the Reuters Commodity index rallying 10% from its lows. Panic seemed to peak on Tuesday as investment funds saw redemptions of 19bn dollars, the second largest since data started being produced in 2007.

With every day we get closer to the day investors will know whether the Federal Reserve will make that first move to raise rates for seven years. The two day meeting takes place on the 16th and 17th of September. The recent economic data would suggest that a rate rise is on the cards, for example this week's improvement in second quarter GDP estimates. Likewise employment data records new jobs are being created at approximately 200,000 a month. The uncertainty and volatility in other parts of the world, mainly Asia, may give the Federal Open Market Committee room for caution.

Volatility of this nature cannot be good for investor sentiment, and one should not be surprised to see it continue at least until the Federal Reserve announcement on September the 17th. The Vix (fear gauge) rose sharply at the start of the week only to fall back just as sharply by the end of the week. Merrill now believes sentiment has reached a bearish enough level to suggest equity markets can rally from here.

The start of the month is always full of economic data, later on Tuesday we see the latest index readings from Markit surveys for US manufacturing, as well as construction spending. On Tuesday we also get a speech from us Federal Reserve member Rosengren, capital markets will be paying close attention hoping for any hints as to what may happen at the next meeting. It would seem logical to assume that Mr Rosengren will play a straight bat giving little away.

The Chinese government announced over the weekend that they were no longer buying Chinese equities. This news did have a negative impact on sentiment in European and US markets on Monday, as the UK enjoyed a very wet bank holiday Monday. Asian markets started the new month in the same manner as the finished the old, on a weak note as the August Chinese manufacturing number came in at 49.7. This was in-line with estimates but down from 50 in July and is the lowest reading in 3 years.

Posted on September 1, 2015 .