This week can probably be best described as a scoring draw for equity prices. The Ftse 100 lost ground after the mining sector saw profit taking. The S&P 500 gained just under a 1% after a strong finish on Friday. The week was dominated by the actions of the ECB on Thursday, as they delivered a package of new measures to help stimulate the European economy.
The actions of central bankers continue to be met by a mixture of emotions. Some investors fear looser monetary policy actions for the unintended consequences a zero interest rate policy may produce. At the same time economists worry that the Federal Reserve are making policy mistakes for attempting to bring rates closer to more normalized levels. We suspect historians and economists will be analyzing and reflecting on this period of time many years after we know the ultimate consequences of these actions.
Sentiment continues to improve towards the oil price, as Brent crude hit $40 a barrel last week. Analysts appear split on whether the price has “bottomed out” from the recent lows, or fundamentals will take over again leading to renewed weakness. Just as equity prices and oil prices have moved recently in tandem, so apparently do US treasury yields. We recently pointed out that equity prices start to rise as 10 year yields fall to the bottom end of their trading range, suggesting fear is peaking. Equity markets rise as yields on 10-year treasuries came close to breaking back through 2% this week, as fears of a US recession are receding.
Looking to the week ahead, after the ECB ‘s actions it’s the turn of the Federal Reserve this week. On Wednesday we get the announcement of the latest interest rate decision, forecasts are now for rates to remain at 0.5%. What may be of more interest will be the following press conference and the Federal Open Market Committee’s economic projections. Once again the Fed may well be faced with trying to provide something of a goldilocks’ economic porridge to investors. Not too cold so they fear a recession, and not too hot that rates will rise quicker than expected.
The UK will be dominated by George Osborne’s budget, on Wednesday, the last one before the June referendum. The Sunday papers appear to be once again very well informed as to what may be revealed. Taxpayers and shareholders who have spent billions bailing out banks have found this money has often gone to pay fines and levies. It looks as if the banking sector may be in the firing line again. According to the Sunday Times George Osborne may be forced to “raid the banks” to find another £20bn to meet his budget deficit target as inflation and economic growth fail to meet targets.