An indifferent week for equity prices, the FTSE 100 rose fell and rose again pretty much in line with the pound-dollar exchange rate. The pound received a boost on Wednesday post the better than expected preliminary reading of economic growth for the UK economy in the third quarter. As the Sunday Times reports, this estimate has now pushed up the likelihood of a rate rise in November by the Monetary Policy Committee to over 90%. The S&P 500 enjoyed a similar week as earnings continue to dominate. Microsoft, Google and Amazon earnings helped boost the NASDAQ Index to new highs. To gauge how big the impact of these companies now has on the index, the movement in those three companies alone raised there combined market capitalisation by more than the entire market cap of IBM! This latest rally in risk assets has been accompanied by record inflows, this could suggest we may be getting slightly closer to euphoria.
With over 50% of the S&P 500 having reported earnings, Factset reports that more companies are reporting EPS above consensus compared to the five-year average. As well more companies are also recording sales above the five-year average.
US Treasury yields rose on the week, the shorter end fractionally more than the longer end. German ten-year bund yields fell below 40 basis points, post the ECB meeting on Thursday. This has to make US Treasuries yielding 2.42% even more attractive to an international investor. Index-linked bond prices have fallen in the past year, having performed strongly over the previous years. Index-linked bonds are a way to play real yields, as opposed to nominal yields in traditional gilts. As the bank of England looks to raise the interest rate and the market expect inflation to fall from the current 3% this makes index-linked bonds look less attractive.
Looking to the week ahead the central banks of the UK and Europe will be in focus. The Federal Reserve and the Bank of England meet to decide whether to change interest rate policy. The Bank of England, as we commented earlier are projected to raise rates by 25 basis points this week. The Federal Reserve is expected to wait until December. Whether the Bank is right to raise rates, only time will tell.
This week could see the appointment of the next chairperson of the Federal Reserve. This is important as markets will be keen to see if we get a hawk or a dove. According to CNBC John Taylor or Jerome Powell seem to be in the hot seat for the role. Powell is seen to be the more dovish of the two.