Don't get too comfortable on the sun bed, August can get cloudy

Another month comes to a conclusion, the unloved equity market rally continues to move on. The results season is in full flow, according to Factset 63% of the companies in the S&P 500 have reported, with 71% reporting earnings above the mean estimate, with 57% reporting sales above the mean estimate. This follows a pattern that has existed for a while that revenue growth is hard to find but companies manage to eke out earnings from efficiency gains. At present earnings have fallen year on year this quarter by 3.8%, this is so far better than forecast expectations of a 5.1% fall, however this is could still be the fifth quarter of year on year earnings declines. Despite this continued lack of earnings growth, the S&P 500 remains close to all-time highs, which is part of the reason the investors remain cautious of being to overweight equities.

Despite much speculation that the Bank of England might lower interest rates, the Federal Reserve might raise them, and the Bank of Japan might add further stimulus measures to the Japanese economy, in the end Bank of England and the Federal Reserve did not move, and the Bank of Japan underwhelmed investors. On the back of this the Japanese yen, often seen as a measure of risk aversion climbed to a three week high, another reason equity investors remain cautious.

Despite this continued caution the Vix index, or gauge of fear and greed, closed the week just above 11, close to the very bottom of the its trading range.

Looking to the week ahead as many fund managers will now be heading off to the sun, August has been known in the past to be one of turbulence. August 2011 was the month the US had its credit ratings downgraded. Last year the devaluation of the Chinese Yuan caused a near 10pct fall in the S&P 500.

The first week of a new month is always dominated with the results of the Purchasing Managers Surveys. This month will be no different. For the US the recent run of better than expected US economic data came to an end on Friday as second quarter GDP came in below expectations. Despite this, expectations remain for a small pick-up in the previous month’s PMI readings.

The UK economy will be right back in focus, after the disappointing Markit flash PMI readings for July a week ago, expectations remain that the Brexit vote will continue to impact the outlook for the economy. The forecast for construction PMI for the month of July is a reading of 45.2, a further fall from 46 in the previous month. A reading below 50 indicates a contraction in the construction market. The big day will be Thursday, as we get the latest inflation report from the Bank of England as well as the interest rate decision. After the expectation that the Bank would cut last month, which failed to materialise, expectations are very high that the Bank will move with a quarter point cut this month. 

Posted on July 31, 2016 .