Some gain after a lot of pain

Equity markets have once again started the week on a firmer note; this is despite weaker than expected import export data from China overnight on Tuesday. As we wrote in our blog at the start of the week, there can come a time when markets start to discount negative news flow having already "priced it in". Time will tell whether this is the case yet with the China data, but on today's evidence it is possible. It is also possible that weaker China data will sway the Federal Reserve into waiting before they move to raise rates next week. The weaker data may also encourage investors to expect the Bank of China to introduce further monetary easing.

The Chinese economy may not be growing as fast as economists hoped, but the news flow from Europe and the US is improving ever so modestly. At the end of August US GDP forecasts for the second quarter were revised higher and likewise on Tuesday estimates for the second quarter euro area GDP were also revised modestly higher. The revision was only a marginal one from an expected 0.3% in the second quarter to 0.4%. Hardly stellar, but at least the move is in the right direction.

We did also highlight at the beginning of the week the lack of volatility in other asset classes relative to equities. We also pointed to the fact that despite equity markets falling last week the Vix had hardly moved last week. The Vix has fallen again on Tuesday, hopefully suggesting that perhaps the extreme volatility of the past months has passed. 

Asian markets over night on Tuesday followed on from the US markets lead, the Nikkei index rising over 5%. Commodities joined in the rally as copper rose its most in over 2 years and the price of iron rose finished “limit up”.

The short-term direction of risk assets may well be driven by what markets believe will happen next week. The World Bank are have now added their voice to the growing chorus of experts who suggest the Federal Reserve should wait before they look to raise rates for the first time in nearly a decade. The weight of public opinion definitely appears to be in favour of them holding fire next week.

The last couple of weeks have seen the FTSE 100 trade in a narrow range between 6000 and 6200. The FTSE 100 is due to test the top end of that range again today when markets open in an hour’s time. Likewise the S&P has recently been trading between 1900 and 1950, the hope will be that sentiment has changed enough to push equities through these trading ranges. 

Posted on September 9, 2015 .