Fund manager surveys at the start of year suggested that professional investors and bank strategists favored European equities over US ones. The rational was a simple one, the ECB were likely to add further monetary stimulus to the euro area economy, whilst the Fed were looking to tighten. So far this year US equities have outperformed European ones, and this trend continued into the first week of the second quarter. As of the close on Friday evening the S&P 500 finished the week higher by 1.3%, the Ftse euro first 300 lower by just under 1%.
The first day of the new quarter was a busy day for macro data, as the readings for the Purchasing manager surveys are released for the month ended. China’s manufacturing PMI came in at 50.2; this was ahead of the forecast of 49.3. For the US economy, Markit research’s final reading for March came in at 51.5, also ahead of expectations. These two readings would suggest the manufacturing bases of the two largest economies in the world are both expanding. The Institute for Supply Management also reported the manufacturing new orders index at 58.3, well above last months of just over 51.
All this good news has led to the Vix index, or measure of fear and greed, fall to levels last seen in August 2015, coincidently just before the summer selloff. The Vix started the year above twenty and closed on Friday just above 13. The latest AAII investment survey saw bullish sentiment fall in the past week, and remains well below the long term average. On Friday Bank of America reported the latest fund flow data recorded the eighth straight week of outflows from equity funds. Despite this more optimistic outlook for economic growth sentiment would appear to remain cautious.
Looking to the week ahead, the main event in the US calendar will be on Tuesday as the Purchasing Mangers Survey for the services sector is released. On Wednesday the minutes of the last Federal Open Market Committee meeting are released. After Janet Yellen’s dovish comments of a week ago, the minutes may reveal if this dovish view is a consensual one amongst other members of the committee.
As for Europe for the week ahead, on Monday the latest unemployment rate for the region. Expectations are for the rate to remain above 10%. Finally for the UK economy, much is being made of the strength of the UK housing market as the Chancellors latest initiative to cool the market comes into force. On Tuesday we get the latest Halifax house price index released. On Friday we get manufacturing and industrial production data for February. Equity markets have traded recently in tight ranges, we shall see if these ranges can be broken in the coming weeks of the second quarter.