Equity prices continued to take a well-earned breather in the past five days, the FTSE 100 has given back a couple of percent from the recent highs, the S&P has given back around 1% from its record highs. Equity prices were slow to react to the selloff in high yield bonds, however, this now seems to be the focus for investors. The S&P 500 took a boost on Thursday from the news that the House of Representatives had passed its version of the tax reform bill. There is still a long way to go before the president gets a bill to sign, now the horse-trading starts. Jim Reid, Deutsche Bank, was quoted in the Financial Times that he believes that some form of tax reform will take place but this is likely to be a first quarter event.
It appeared to be a week for a correction in most risk asset prices, as commodity prices also gave ground. Encouragingly, the Vix index which did spike in the middle of the week to 14, closed the week pretty much where it started at 11.5. As Brexit negotiations continue the pound remains resilient, particularly against the US dollar, however, helped by the fact the dollar remains weak against its peers.
The other concern for equity investors may be the recent flattening of the yield curve. The spread between the 10-year US treasury and the 2-year is now standing at just 62 basis points, the lowest in a decade. The curve is not yet inverting (when longer-dated yields fall below shorter ones) which is considered a signal that the bond market is forecasting an economic recession.
Looking to the week ahead, its Thanksgiving week in the US this week. Traditionally quite a good week for equity markets as the general joie de vivre this week brings extends to equity markets. Fund managers do not want their Turkey meal with their family disturbed by falling stock markets. The second half of the week is pretty much written off as markets are closed in the US on Thursday and open for just half a day on Friday. Ahead of the break the Fed releases the minutes of their last meeting, even though it is unlikely to reveal anything new, it is likely to get some air time in financial circles.
The main event over here will be the budget on Wednesday. Philip Hammond will be under pressure to avoid any banana skins. Housing seems to be a subject that a lot of the papers focus on, creating and making housing more affordable. The question is where does the money this year come from? There have been suggestions for reducing the VAT threshold, not much of an incentive to small business. The Sunday Times floated the idea of a possible wealth tax, replacing inheritance, capital gains and dividend tax. The one thing is almost certain that those who already contribute the most to the Treasury coffers will be asked to do so again.