Into the final furlong

The third quarter comes to an end, not a bad quarter for the FTSE 100 rising just over 3%, this is in comparison to the S&P 500 which remained pretty flat over the quarter. Part of this difference in performance could be accounted for by the difference in monetary policy stance over the past quarter. The Bank of England announced further monetary stimulus in the aftermath of the Brexit vote whereas the Federal Reserve keep goading the market into believing they are about to raise interest rates for the second time since 2008. The pound has remained pretty stable in the quarter after the sharp fall over the Brexit vote. The pound has lost just over 1% in the quarter against the US dollar.

Investor sentiment appears to be just as negative as it has been pretty much since the bull run started. The latest AAII retail investor survey reports that only 24% of those surveyed believe the market will be higher in 6 months’ time. According to Saturday’s FT over 100bn euros has been withdrawn from European equity funds. Active fund managers continue to be hit in favour of passive ETF’s.

The news this past week has mainly been dominated by the trials and tribulations of Deutsche Bank, as if there weren’t enough uncertainties to focus the mind on. Over half of Deutsche Bank’s earnings comes from investment banking. Many of the new regulations that have been put in place since 2007 to control the activities of investment banks, for example the capital required to indulge in these activities, have curtailed profitability. On top of this the fines, as well as the introduction of the negative interest rate policy has further hindered the banking sector. Banks survive on confidence, once counterparties lose confidence in a bank the days can be numbered. It’s fairly certain that if push comes to shove the German government would in extremis bailout Deutsche bank if required to, however the equity holders are likely to be less fortunate. 

Despite the volatility caused by the Deutsche Bank concerns, equity markets in Europe fell only marginally in the past week. The US economic data suggested that the economy is slightly more robust the economists were forecasting, notwithstanding this US bond prices remained little changed on the week.

The coming week will be dominated by the release of September’s Purchasing Managers Surveys, depending on the outcome of the index readings may seal one way or another the fate of US interest rates in December. The World Trade Organisation now forecasts that global trade will grow by 1.7% this year, the lowest since 2009. We shall see if that forecast impacts the PMI readings.

As for the UK economy later on Monday sees the release of the manufacturing PMI, expectations are for a small pull back from the jump seen in August. Forecasts are for a reading of 52.8, above the crucial 50 mark that indicates an expanding manufacturing base.  Earnings season starts the following week. 

Posted on October 2, 2016 .