Equity markets overall reacted well to the Bank of England raising interest rates for the first time in 10 years. The FTSE 100 rose 1%, the S&P 500 a little less and the Stoxx 600 managed to eke out a small gain. The pound fell back from $1.33, helping boost the FTSE 100 back over 7500, once again a level it seems to reach and then suffers from altitude sickness. The FTSE 250 index continues to make new highs. Just as bond yields fell along with the euro when the ECB tightened their policy stimulus last week, the pound and gilt yields reacted in a similar manner the Bank of England’s move. One would normally expect yields to rise as monetary policy is tightened, this did not happen in either case as both central bank actions were accompanied by very dovish statements for interest policy going forward. Central bankers remain cautious of spooking the markets by suggesting they wish to tighten policy to quickly and lead the market to concern themselves they are making a policy mistake.
On Friday we did get a piece of solid economic data for the UK economy. The Markit Services Purchasing Managers Index reading for October came in at 55.6, well above the previous months 53.6, and expectations of 53.3, and the third quarter average of 53.5. Capital Economics view is that this data along with some better than expected services and construction data earlier in the week suggest economic growth in the final quarter could come in 0.5%.
The Vix index closed the week back close to the historic lows of earlier in the year. This indicates that investors once again feel confident the equity market remains underpinned by the actions of central banks. Sentiment indicators, such as the one issued on a weekly basis by Barron’s, suggests that investor sentiment may be getting closer to euphoria.
On Thursday The House Ways and Means committee released the first draft of the Donald Trumps tax plan. On Monday they will begin to look at revisions to the bill. Merrill Lynch house view is that in its current state there are too many issues for the bill to pass and assume no fiscal stimulus. Earnings continue to dominate the investment scene. Again, according to Merrill Lynch after the third week of European company earnings 52% beat on earnings, about in line with average. Just over 80% of the S&P 500 companies have now reported. Factset report that 74% of the companies have announced earnings above earnings estimates compared to the five-year average. When looking at sales 66% of companies have reported above estimates again better than their five-year average.
Looking to the week ahead, Donald Trump begins a 12 day visit to Asia, which includes a meeting with President Xi Jinping. There are liable to be many tweets in the coming days and the subject of North Korea is bound to come up. Brexit discussions between Barnier and Davis resume this week. There is less to focus on the macro this week, on Friday UK Industrial and Manufacturing data for September. In the US on Friday, Michigan Consumer Confidence will draw the focus.