The FTSE 100’s previous week's gains were evaporated in the past five days with interest. Developed indexes across the world had a poor week as the eurofirst 300 lost almost 3%. The S&P 500 fared slightly better losing just over 1%, as it staged a modest rally at the end of the week. Donald Trump’s sabre rattling comments towards North Korea appeared to be the catalyst however times like this can as much an excuse as a reason. There was a move towards the safe-haven assets of gold, US Treasuries and the Japanese yen, as equities fell. The Vix which has spent an extended length of time close to its historic lows recorded sharp gains on Thursday rising over 40% in one day. The Index closed the week above 15, having reached a record low a few days below 9. We shall see if equities recover this week as historically the adage buy on a conflict does seem to hold true. Equities have now seen 9 straight weeks of inflows and according to Merrill Lynch’s flow analysis, hedge funds are now positioned bullishly relative to history.
The spread between high yield credit and government debt is a measure some analysts look at as another guage of excessive risk taking. Spreads are now as now as tight as it has been from the start of the 2007 crisis and before the Asian crisis in 1998. On a slightly more positive note the Dow Jones transport index, which we had highlighted recently had been weakening did have a modest recovery over the week.
The main event last week was the release of July’s US consumer price data, and whether the weaker dollar was having an impact. The answer to the question appears to be no. Analysts had forecasts year on year inflation to rise to 1.8% in the month of July, the actual reading came in below that at 1.7%. This week sees the release of the minutes from the previous months Federal Reserve meeting. Ahead of the release, the recent rhetoric from several of the Federal Reserve members has become more dovish.
This week we also get the latest retail sales data for the US economy. Retail sales are forecast to rise by 0.4% in the month of July. This was after a fall of 0.2% in June. We also get on Tuesday, import and export prices, again it will be worth noting what impact the weaker US dollar will have had on that data.
As for the UK economy, there is something for most everyone this week. On Tuesday, we get our latest inflation data. Analysts are forecasting a small uptick in the month of July from June, back to 2.7%. On Wednesday the latest unemployment rate, average earnings and then on Thursday retail sales. All this should give further evidence to the strength or otherwise of the underlying UK economy.
There is also plenty to focus on in Europe this week including inflation data. The one analysts may focus on is the latest second quarter GDP estimate and any sense the stronger euro against the US dollar is impacting economic growth.