We are now entering the summer holiday season. Europeans in particular traditionally take most of August off, those who are travelling outside the euro area will benefit from the recent strength in the euro. The euro hit its highest level against the US dollar in two years last week. A combination of a further softening of the dollar and continued improved sentiment to the euro, post-Mario Draghi’s recent comments. The European stock exchanges fell nearly 2% in the week, in contrast to US and UK equity prices which made small gains on the week.
Earnings season continues to dominate the headlines, there was a great demonstration this past week of how investment trends have changed from the old to the new. Netflix, the on demand tv company, shares jumped 11pct after announcing strong subscriber growth in the second quarter. On the other hand, two stocks that have their roots further back, IBM and GE failed to excite investors. IBM’s shares fell despite beating earning expectations as the company announced the 21st consecutive quarter of revenue declines. One company that is managing to adapt itself to the modern era is Microsoft as the shares responded well to second quarter earnings and revenues beat. Overall earnings season has so far been a mixed bag with no true picture coming through yet. However, more big heavy weights report in the coming week, with old favourites such as Johnson and Johnson, along with the new era of Google, Amazon and Facebook.
The Vix index fell 1.5% on the week as investors once again appear to remain confident that the current Goldilocks environment can continue for a while longer yet. The failure of Donald Trump to introduce his reform to Obama’s healthcare bill barely registered on the markets. It may well just go to prove that equity investors have discounted the President’s ability to deliver on his policy initiatives.
Looking to the week ahead, the main event will be the Federal Reserve’s meeting on Wednesday. There are no expectations that the Federal Reserve will act to raise rates this week, what will be of greater interest will be the statement that comes with the announcement. Janet Yellen has given some indications that the Fed might not be wedded to a further rate rise this year. Indeed, the bond market is now placing a less than 50% chance before the year end. After a disappointing first quarter GDP reading for the world’s largest economy, there are some expectations things will have recovered in the second quarter to grow by 2.5% year on year. The Bank of England release their estimates for second quarter growth for the UK economy on Wednesday. Economists forecast growth of 1.7% year on year. Nearly 40pct of the companies that make up the S&P 500 are due to report this week, that will keep analysts busy and give a clearer understanding if the high single digit earnings growth expectations for US companies in the second quarter is achievable.