A solid week for equity markets again, the FTSE 100 appeared little disturbed by opinion polls showing a narrowing of the Conservatives lead. Yields on the 10 year UK gilt closed just above 1% on Friday. The pound did retreat away from 1.3 against the US dollar, however that could be as much do with a recovery in the US dollar overall. The gilt market, in our opinion will be the ultimate opinion poll. If there is a true belief that the Labour party are starting to make a real threat, yields on 10 year gilts will start to rise as overseas investors will look to sell UK assets. The S&P 500 closed at a at a record high for the third day in a row.
The correlation between the movement in the oil price and equity markets appears a thing of the past. The oil price fell lost almost 3% on the week despite the agreement from OPEC to extend production cuts. US GDP for the first quarter was revised up from an annualised rate of 0.7% to 1.2%. Despite this improvement there appears concerns amongst some analysts that the transitory dip in growth as described by the Fed, may not be as “transitory” as the Fed believes. Despite this, the Federal Reserve are still expected to raise rates for the second time this year, in June. 10 year US treasury yields closed the week exactly where they started it, 2.25%. The Vix index fell again this week, once again trading close to the historic lows it reached a week or two ago. If the spread between high yield and government debt is an indication of greed, a difference of 300 basis points is about as tight as it gets. Currently the gap is 350bp, getting close.
Looking to the week ahead, on Tuesday we get the UK consumer confidence reading for May. Consumer confidence has been falling for most of the year and is expected to dip again in May. On Wednesday consumer credit and mortgage lending for April. Then on Thursday Nationwide Housing prices, forecasts are for house prices to have risen year on year in May by 2.5%. Finally, on Thursday Markit’s Purchasing Manufacturers Index for May. Consensus forecasts are for an increase to 57 from April’s reading of 56.5. The lead up to the General Election will probably dominate the headlines in the coming week.
It’s a busy week for US data, all of which will be dissected to see if the expectation of a Fed rate hike for June remains intact. Amongst many data points we get payroll data, truck sales, Purchasing Manager Surveys for manufacturing, employment, new orders, and prices to mention some. We also get the latest unemployment rate and the US balance of trade for April.
On Wednesday and Thursday, the manufacturing PMI in May for China are released. With tightening monetary conditions in the first few months this report may give an indication if the Chinese economy is slowing down as a result.