Ahead of the week when we finally hear whether the Fed will move interest rates for the first time in 7 years, the S&P had its best week since July this year, rising just over 2%. This rise helped the developed markets of Europe the UK and Japan also make modest gains over the week. What will happen on Wednesday remains uncertain, not only in investor’s minds but probably also in the minds of those who will ultimately be making the decision.
Gold prices fell to their lowest level in five years on Friday, as gold becomes less attractive as an asset if rates do rise. As Mr. Aurther’s points out in his Long View article in Saturday’s Financial Times, there is no direct correlation between the start of a rate rise cycle and falls in equity prices. Equity prices tend to fall at the peak of the rate cycle. Mr. Aurther’s also goes on to point out equity markets will be led by the reaction to any news in the bond market. This was a point we made on more than one occasion as the markets anticipated the end of quantitative easing. So far, unlike equity prices, bond markets in the US have remained remarkably stable ahead of Wednesday’s announcement.
Equity funds, after last weeks, inflows once again saw large outflows, ($19bn) bringing the total outflows to $46bn in the past 4 weeks. Bonds continue to attract money making it 10 straight weeks of inflows.
We pointed out at the start of the week that despite the weakness in equity prices, the Vix had hardly moved. We took this as a sign that perhaps equities could rally in the week ahead, which they did. The Vix fell again in the past week, however at 23 it remains at elevated levels compared to recent history.
Aside for the events in the US on Wednesday, in the UK on Tuesday we get the August inflation data and on Wednesday the UK unemployment rate and average earnings. Average earnings growth, according to the weekend press, could climb to 2.9% in July. Growth in earnings should lead to inflationary pressures as households have more disposable income. On Thursday we get the latest retail sales data for the UK economy. This increase in disposable income has yet to be reflected in the high street, as retail sales data remains subdued, suggesting households continue to use income to reduce debt burdens.
For Europe there is a continual flow of economic data during the week, on Monday industrial production, Tuesday employment data, Wednesday inflation rates and on Thursday the ECB economic bulletin.
Uncertainties remain about the strength of the global economy leaving investors to remain cautious on equity markets, however at least on Wednesday one uncertainty will be removed. Ahead of Wednesday equities do appear to be starting the week on a firmer footing.