Careful what you wish for

Equity markets at the end of the week did not take the news well that Janet Yellen is leaving interest rates where they are for now. This is despite fund managers and brokers almost united in their view that rates should stay where they were and raising them risked a 1994 type sell off in bonds and equities. Equity markets, despite the fall on Friday of between 1 and 2%, finished the week roughly where they started them. The Vix fell again on the week; this could suggest that investors may become more comfortable with the outlook for equities.


John Authers writing in the FT at the weekend, as well as Irwin Steltzer in the Sunday Times, expressed the view that the lack of action by the Fed on Thursday added uncertainty to the outlook, and markets don’t like uncertainty. In our view the uncertainty at least for this year as to what will happen with rates is removed, they are going nowhere.


In her comments Janet Yellen refereed to the deflationary pressures coming from China influencing their decision. The likelihood is that the Federal Reserve’s decision was made for them when the Chinese devalued the remimbi last month. The start of the rate rise cycle could have further strengthened the US dollar; this could in turn have encouraged China to devalue its currency again causing more uncertainty. US treasuries rose on the news, yields fell to 2.13% for the ten-year maturity, fairly close to where they started the year.


Equities saw inflows in the week ahead of the Fed decision and bonds saw another week of outflows. Emerging Markets saw the smallest equity outflows for 10 weeks.


Looking to the week ahead, as Janet Yellen has now put China more into the eye of the investor; data from that region will be further scrutinized. On Wednesday we get the Caixin Manufacturing Purchasing Managers Survey for September. As for the US it’s a fairly quiet week, Thursday will probably be the focus. Durable goods orders, jobless claims and new home sales will all make headlines. If rates are to stay close to zero and economic activity remains robust this should help equities. Janet Yellen is also due to speak on Thursday, after the mixed response she has received from the meeting last week, investors will be hoping for more clarity on the Federal Reserves policy intentions.


The FTSE 100 closed on Friday towards the bottom end of its recent trading range, the S&P 500 in the middle of its recent range. As yields in the bond and money markets remain close to zero, equities remains one of the few places savers can find income. The FTSE 100 once again yields close to twice that of the 10-year gilt. Assuming those yields are sustainable that may offer some support. 

Posted on September 21, 2015 .