Despite a couple of wobbles during the week, the FTSE 100 managed to hang onto the gains made in the previous week, post the Brexit vote. The FTSE 250 index, which has had a rockier ride post Brexit did manage to recover some of the losses from earlier in the week. The S&P 500 finished the week above 2100, close to the all-time highs, at the same time yields on US treasuries reached lows for the year. Falling bond yields and rising stock markets don’t often go hand in hand.
The spread between yields of government bonds that are due to mature in the next couple of years (known as short dated), and the longer dated ones, for example those that mature in ten years, is known as the yield curve. The wider the gap in yields between short dated and long dated bonds, the steeper the curve, the more optimism there is of economic growth. Should the gap narrow or invert to a point where shorter dated yields are higher than longer dated, this is an indication of weaker economic growth to come. Since the start of the year the US treasury yield curve has flattened to the point where the gap is down to 0.7% between long and short dated yields, at a time when equity markets in the US are close to all-time highs.
At the end of the week the Vix index is back below 15, at 13.2 this is close to the lows of the year. The weekly AAII retail investor survey recorded a fall in those who believe the markets will be lower in 6 months’ time, and a rise in those who believe it will be higher. However, bullish sentiment at 31% remains well below that of the historic average of 38%. Lipper fund services reported that another 6bn dollars came out of equity funds in the past week.
It’s a busy week ahead for the Bank of England, on Tuesday the Bank releases its quarterly bulletin where they explore topics on monetary and financial stability. Mark Carney will deliver his views. It would make a pleasant change if he stopped talking down the UK economy. On Thursday we get the monthly rate decision, as well as the minutes of the last meeting of the Monetary Policy Committee. The weekend press is full of expectation that the Bank will not wait any longer to act and cut interest rates.
Post Friday’s strong US nonfarm payroll report, the main macro focus in the coming week for the US will be at the end of the week with the inflation and retail sales reports for June, as well as the Michigan consumer confidence survey. This week also sees the start of the second quarter earnings season with Alcoa later on Monday, followed by the US banks later in the week. We have had four quarters of negative earnings growth for the S&P 500, and analysts are forecasting a fifth.
China will come back into focus this week, on Wednesday we get the import export data for June, and then on Friday estimates for second quarter GDP. The year on year growth is forecast to be 6.7%.