As we enter the final week of the second quarter, moves in leading developed equity markets over the week rather reflected the quarter, solid in the US, mixed in the UK. The Vix index continues to reflect the low volatility environment we live in. The index closed the week just above ten and remains close to historic lows. The price of oil dominated headlines this week as Brent crude fell almost 4% on the week. Commodity prices, in general, had a mixed week as the Thompson Reuters/ CoreCommodity CRB index fell just under 3%.
The US dollar which can influence the commodity markets finished the week approximately where it started the week. The pound fell to 1.26 to the dollar at one point in the week, however, did recover to close above 1.27. The oil price recovered from the lows of last year on hopes that the OPEC agreed supply cuts would offset US production. Concerns this may not be the case has seen the price fall back 20% from its highs. Equity markets and oil prices were quite well correlated last year; however, this correlation seems to be breaking down. Part of the reason may be explained as investors see the recent fall as more a supply issue and less of a demand issue. The recent price falls will also feed into inflation numbers in the coming months.
US Treasury yields likewise moved little on the week, ten-year yields, at 2.15%, remain close to the lows of the year. The yield on the ten-year gilt did dip below 1%, however, is now trading back just above that level. On Friday, we saw the eurzoone flash estimate for June Purchasing Manager Survey. The composite figure (combining services and manufacturing) came in below forecasts at 55.7, mainly due to a weaker than expected service component, falling to a five-month low. According to Markit the providers of the data, this report rounded off the strongest quarter of economic expansion for over six years.
The Flash US Composite Output index fell in June to 53 from 53.6 in May. According to Markit, this reading signalled the slowest upturn in business activity for three months. Commenting on the data Chief Business Economist at IHS said the US economy ended the second quarter on a softer note, however the survey data points to annual GDP growth of around 3%.
Looking to the week ahead it remains a fairly quiet one in Europe. The annual ECB Forum on Central Banking will take place at the start of the week in Portugal. Ben Bernanke, the former Fed Chair along with Mario Draghi are due to open the forum. Mark Carney will appear on a policy panel on Wednesday.
As for the US, there will be a couple of data points for the US economy. On Monday US, Durable goods orders which are forecast to bounce back from last month’s fall. On Thursday, the final estimate for Q1 GDP. We get the same report from the UK for Q1 GDP, year on year growth is expected to be 2% for the UK economy. Also on Friday, we get the latest consumer confidence report. Consumer confidence has suffered as inflationary pressures have taken hold, will be interesting to see if the recent dip in oil prices has improved consumer sentiment.