Three-quarters of the year have now passed, the MSCI world index up 13% year to date, helped by a strong recovery in emerging markets, up over 25% from the start of the year. Judging by the Merrill Lynch Fund Manager survey from 9 months ago, not totally unsurprisingly, fund managers were not positioned for such a recovery in Emerging Market equities. This would have been predicated on the expectations the US dollar would rise as the Federal Reserve raised interest rates in response to the Trump tax stimulus package. Trump has failed so far to implement any of his tax initiatives, despite this, the Fed has raised rates twice this year and expect to do so for a third time in December. They have also announced the beginning of quantitative tightening. Emerging Markets have recovered as the US dollar has not performed as expected, falling approximately 10% from the beginning of January.
Entering the final quarter, some of the trends that have dominated the year so far are reversing, longer-dated bond prices have been falling, the US dollar has had its first monthly rise since February. The price of oil, who many speculators had written off a dead money, has hit a two-year high. One trend that has remained, equity prices continue to be resilient. The next test for equities will be the third quarter earnings season. According to research house Factset, forecasts are for the S&P earnings to grow 4.3% in the third quarter. This is marginally lower than the 7.5% forecast in June. The energy sector is expected to deliver stronger earnings growth. Another trend that has remained intact, so far, the Vix index continues to trade near record lows.
At the start of every month, we receive the global Purchasing Manager Surveys for the previous month. This is considered one the key indicators for future economic growth, and having dipped in the summer the JP Morgan global composite PMI survey picked up last month. Forecasts are for the Markit Composite PMI for the US economy to rise again in September.
Last week the UK reported its final estimate for economic growth in the second quarter of the year, bearing in mind this is a backwards-looking piece of data. Despite this the month on month estimate remaining unchanged, the year on year estimate was revised down. The Governor of the Bank of England appeared on the national media to prepare the UK for an interest rate rise in the coming months, reversing last Augusts decision. Just at the same point, the UK economy has fallen from the top to the bottom of the G7 leading economies. Mr Carney has not had a good track record of forecasting economic activity or the possible path of UK interest rates since he took the role, this has all the possibilities of being another mis-judgement. On Tuesday we get the minutes from the last Financial Policy Committee and later in the week a speech from Sam Woods, deputy Governor of the Bank of England. We shall see if he sings from Mr Carneys song sheet.