Another decent week for developed equity markets, which takes the FTSE All World Index rise from the lows in February to 18%. Strong results from Vodafone and Sofbank bidding for Arm helped provide further support for the FTSE 100. Traditionally the higher equity markets go the more loved the rally becomes, in this case it appears the opposite. On Friday we received the first piece of economic data post the Brexit vote, and to be fair it did not make pretty reading. Markit research released their purchasing Managers Index flash estimates for manufacturing, services and the composite of the two for July. These surveys were taken post the vote and probably reflect the initial shock that business felt immediately after the vote. Services accounts for 80% of the economic activity in this country, and the index reading fell to 47.4, a seven-year low. One suspects that the final reading at the end of the month may not look quite so bad, and hopefully as nerves calm even further that the readings will pick up again in August.
With over $12 trillion dollars of government debt offering negative yields investors remain wary of holding any assets, except it feels, gold. However, the oil price is losing some of the earlier month’s momentum as the West Texas crude price, having hit over $51 a few weeks ago traded back to $44 on Friday.
It is an important week ahead for the Federal Reserve and the Bank of Japan. A raft of economic data from the Japanese economy culminating on Friday in the Bank of Japan’s monthly rate setting meeting. There is a degree of anticipation that the Bank will introduce further stimulus measures, including the possibility of “helicopter money” to try and help invigorate the Japanese economy and reach the stated target of 2% inflation.
The other big event this week will be the meeting of the Federal Open Market Committee on Wednesday, when we get to hear whether the Fed will leave US interest rates where they are for another month. The Wall Street Journal believes that the Federal Reserve will not move on rates this month, taking into account officials public comments. However, we believe that it would make most sense to do it this month if they are in the mind to do it this year at all.
The US economy continues to tick along as the data continues to make or beat expectations. We have heard Fed officials say they now believe the impact of Brexit on the US economy is close to zero. If they are in the mind to move, why wait till August, a month when many investors are on the beach with their families. September, October and November are getting very close to the Presidential election and December is the last month of the year.
The committee has constantly tried to manage investor expectations on interest rate moves, one alternative scenario to moving this week is to send a clear signal to the market that they intend to move in August. All will be revealed on Wednesday.