The first half of the year has drawn to a close and the only asset class that failed to provide a positive return in the first six months was euro high grade bonds. The best performances came from the S&P 500 and the MSCI emerging market index. The FTSE 100 rose circa 4% in total return. In contrast to the rest of the year almost every asset class fell last week, if only modestly. Bond and equity prices have risen in tandem, so they just as easily likewise fall. One of the exceptions last week was the oil price, after entering bear territory the week before, Brent Crude rose 5% in the past week, partly assisted by a weaker US dollar.
The markets continue to pay much attention to the words of Central Bankers, in part as there is a common view that to some greater or lesser extent the rise in equity prices has been driven by the that loose monetary policies we have enjoyed over the past years. Mario Draghi this week, in a speech on Tuesday added to the belief that central bankers are moving into a period where they are more inclined to tighten, as he talked about reflationary pressures and economic growth.
Even though yields on bonds did rise in the advanced economies this week, they do remain close to historic lows. The Federal Reserve remain committed to a gradualist approach to raising rates. The market had expected the third rate rise this year to be in September, however the odds seem to be fading as the economic data this year have failed to meet expectations.
The earnings season will soon be upon us for the second quarter, this again will be an important driver to maintain the momentum equities have seen in the first half of the year. According to the Financial Times, 9 out of 11 major sectors in the S&P 500 index are set to report higher earnings per share than a year ago. Assisted by growth in the global economy and a weaker dollar. Factset are anticipating a blended growth rate of 6.6% in earnings per share, year on year for the second quarter.
Looking to the week ahead, on Tuesday the US jobs report for June is released. Estimates are for non-farm pay rolls to increase by 180,000 an increase in the previous month’s 138,000. Unemployment rate is set to remain unchanged at 4.3%. Manufacturing data and construction spending is also released on Tuesday. Later in the day the minutes of June’s Fed meeting are released. This was the meeting in which the decision was taken to raise rates for the second time this year.
On Wednesday UK services purchasing managers indices for June are released. Expectations are for a modest contraction from May’s reading of 53.8. A slowdown in the manufacturing PMI is also anticipated. These monthly reports are considered a good lead indicator for an economy. Further weakness could add to concerns to the strength of the UK economy.
On Friday German Chancellor Merkel hosts the annual summit of G20 leading economies in Hamburg. Mr Trump and President Putin will also meet for the first time at the gathering.