"Its fine to celebrate success but its more important to heed the lessons of failure" Bill Gates

It’s been a much more active week for market participants to analyze, digest and react to, aside from the implications for a company such as GE possibly needing to cut its dividend. Stock prices are supposed to reflect all future cash flows discounted to the present day. That’s why the possibility of dividend cuts from a “blue chip” company can have implications for valuations across the broader market. If they can do it, so can others. Wednesday saw most sectors pull back, the Vix rose at one point to 13, however closing virtually unchanged. Once again, the dip over the last couple of days reinvigorated market commentators to look for cracks in the US market and signs of a bigger correction.

UK equities had a poor day on Tuesday as the FTSE 100 fell on the back of a stronger than expected preliminary 3rd quarter GDP report. The stronger economic data led to a rally in the pound against both the euro and the USD. Bond markets had been pricing in about an 80% chance of a November rate rise, those odds probably narrowed slightly. The better than expected data has probably sharpened the claws of the hawks amongst the MPC. We did comment last week that we believe sentiment is so poor to the pound that any incremental good news could see a further rally.

As well as GE the recent sell-off in US Treasuries has probably helped knock back equity sentiment over the past couple of days. The Ten-year US Treasury yield almost touched 2.5% earlier this week, however, the two- year has been keeping pace meaning the curve has not steepened. For a global investor, a yield of 2.44% on US Treasuries is starting to look quite attractive, particularly when you can compare it what German bunds currently offer. On Wednesday Septembers Durable Goods orders reported a jump of 2.2%. According to Capital Economics, the strength in the number should suggest business equipment investment will continue to accelerate into the fourth quarter, and that the economy will continue to grow into the year end. 

The main event of the day was the monthly rate-setting meeting from the ECB. The ECB announced that they will cut the bond purchase program from 60bn euros a month back to 30bn euros from January. Interest rates remained where they currently are and are not likely to change in the foreseeable future. The euro lost a little ground against US dollar, however, European bond yields fell slightly. In theory, the fact that the ECB will be buying fewer bonds in the coming months could have led to a fall in bond prices. The rise was attributed to comments that purchases of this scale could extend beyond September next year. The weakness in the bond market may also be as a result of the ECB’s expectation that euro-area inflation will not reach their 2% target before 2020.

Posted on October 26, 2017 .