A good week for equity investors as the FTSE All World Index rose to record levels. At the same time the Vix index fell to levels that suggest greed is the driving emotion for equities. Michael Mackenzie takes up the point writing in the Financial Times on Saturday as he expresses the view that these gains are driven by investors fearful of missing out, rather than the concerns that a correction may be on the way. The reality is, in our opinion, equity investors are very fearful of the gains that have been made in equity markets but lack an alternative. With inflation on the rise, and the press full of talk of the reflation trade, holding cash provides no income and its value could be eroded. Bond yields currently offer rates below the level of inflation, investors lock in losses owning gilts at current yields. Property offers a yield but liquidity could be an issue, gold is a negative yielding asset. Reluctantly investors are drawn to equity investment. Mr Mackenzie has failed to understand what is driving equity investment in the current climate.
Looking back over the past week, earnings reports for the first quarter have helped support equity valuations. The past weeks Purchasing Managers Surveys, suggest that despite some recent weakness in the US economy the global economy remains on track. The global composite PMI (services and manufacturing) for April came in at 53.7, this compares with 53.8 for March. The Federal Reserve are now expected to raise rates in June, post the release of the minutes from the April Federal Reserve meeting.
The main talking point this week, aside from the French Presidential election, which Monsieur Macron has now secured, is the fall in commodity markets. What does that tell you of the strength of the underlying global economy? The gains that commodity markets made since the Trump trade made headline news in November have been eradicated. On the one hand this may reflect possible weakness on the global economy to come, the flip side is global inflation may tick lower again taking the pressure of central to raise rates. What we must be aware of is inflation continuing to creep higher and at the same time economic growth weakening. The dreaded stagflation.
Looking to the week ahead, company earnings will remain in focus, it is another full week of results. Other events that may grab some headlines is the Berkshire Hathaway annual shareholder meeting. The European Commission publishes new economic forecasts after warning in February of risks to growth from Brexit and the U.S. election of Donald Trump. The Group of Seven finance chiefs begin three-day meeting in Bari.
As for the UK economy Thursday is a big day, we get the latest interest rate decision as well as the Bank of England’s inflation report and the minutes from the last meeting. We also get on Thursday industrial and manufacturing production for March.