The Hawks fly in

Equity and bond markets are waking up to the believe that the Federal Reserve are in the mood to raise interest rates again, conceivably in June. The release of the minutes from April meeting of the Federal Open Market Committee on Wednesday evening revealed that officials see a June rise as a real possibility. Only a few days ago, despite the rhetoric from several key members of the committee suggesting otherwise, the market was only placing a very small possibility of a hike next month. After Wednesday's release the market is now placing a 36% chance, however July has become the favourite with a 50% chance.

What is also of note is that some of the reluctance to move for the second time this year appeared linked as much to the concerns for the global economy overall, despite an improving picture in the US. The minutes also revealed the committee believes the risks to the global economy had receded.  Equities and bond prices initially fell in the US as investors worried that the increased cost of investing would not be fully compensated by an improving economic outlook. However, by the end of Wednesday equities in the US had regained most of their losses. This did not stop markets in Europe reacting negatively to the minutes on Thursday.

The next rate setting meeting is over June 14th and 15th and, many so called experts held the view that the Federal Reserve would not move ahead of the Brexit vote. The Financial Times poll of polls indicates that the majority will vote to remain, but the margin remains relatively close. Forty-six percent in favour of remaining in, 40pct against and 12pct undecided. The bookmakers remain odds on in favour of a remain vote. If the exchange rate is a further guide as to where sentiment lies on Brexit the recent strength in the pound could be another sign that speculators are becoming more comfortable with a yes vote.  Perhaps the Federal Reserve has also taken comfort from these statistics.

Adding to the negative sentiment towards equities, this week Goldman Sach’s, the US investment bank turned neutral on equity markets, mainly as they see valuations looking stretched. Warren Buffet is known amongst other things for his contrarian views on investing. We commented this week that the securities exchange quarterly filling revealed Warren Buffet had invested $900m in Apple, what the filling also revealed is that amongst the broader investment community it was the stock that had seen the largest outflows. Once again proving when many see fear some see opportunity.

Finally, there was for the first time in a while some good news on the UK economy as retail sales for April beat expectations. Year on year growth in retail sales came in at 4.5% against forecasts of 2.3%. We doubt this news will influence the Bank of England to change its current stance on interest rates.

Posted on May 20, 2016 .