Our start of the week blog headline “Time for the bulls to fight back?” On Monday this view seemed timely as European markets bounced back after last week’s falls. Even US equity markets started the week in a positive way, however, lost ground as the day wore on. One is always looking for indications as to whether the bulls are trying to fight back. The Vix finished the day unchanged suggesting that investors no longer want to pay up for protection. The Japanese yen is an indicator of risk aversion, and this was demonstrated in the past week as the yen rallied. In the past 24 hours, that trend has reversed. Another indicator of risk tolerance is the performance of smaller cap stocks relative to larger capitalised companies. Equity rallies are led by smaller cap stocks, as are declines. Over the past 24 hours, smaller cap stocks have started to outperform. The transportation index has likewise recovered over the past couple of days. The bulls may find the headwinds remain but at least they seem to be making an effort.
One story last week that we really did not comment on but may offer a warning to investors who own stocks for their dividends, particularly this with leveraged balance sheets. Anheuser-Busch announced a dividend cut with its results last week as it decided to focus on reducing its debt burden. Anheuser-Busch is a global seller of beer, an industry that is meant to be highly defensive. Anheuser-Busch problems stem from the all-cash acquisition of SAB Miller in 2015, this left the company balance sheet highly leveraged. Another global company, GE, probably for so long a staple part of a retail investors portfolio announced further cuts to its dividend on Wednesday, to just 1 cent.
As interest rates rise companies with highly leveraged balance sheets will find it harder to service these debts and more dividends could come under threat.
As the Italian government continues to battle with Europe, problems may surface elsewhere as German inflation hit a six-year high this week. This at a time when the German economy appears to be suffering from the effects of trade tariffs. Slowing economic growth and rising inflation is not a good combination. The term for