Selling the rally or buy the dip? That is the question


A quiet start to the week, equity market on Monday were little changed, US treasury yields did tick back over 2.9%. According to Lipper fund services fund investors are selling the bounce not buying the dip, as redemptions continue. Amongst the media, there is speculation that some investors have been waiting for the magical 3% to buy back into the ten years. It was not so long ago that you could not get 2.2% on the ten-year let alone the two years, which is currently what the two years just about offers. At this point in time, and with German ten-year bunds still offering a yield well below 1%, the two year seems a more attractive a proposition due to the much shorter maturity. Not that one is necessarily advocating buying government debt at all currently but given the choice, it would appear better value. One must remember yields on the two years have reached as much as 6% at one point in history.

The German ZEW survey of analysts looking into the next six months did fall as predicted, probably in reaction to the recent nervousness in stock markets. After the recent correction market professionals continue to discuss this idea of expensive equity markets. It is worth bearing in mind the Euro Stoxx 50 is 10% below where it was in early 2015, and trades on a weighted forward price to earnings of 15x, and a price to book of 1.5x, that does not feel not too demanding. The FTSE 100 trades on an even less demanding multiple of just below 14x according to Bloomberg. It’s the American market that remains expensive compared to history.

The fun and games will start on Wednesday, the main one will be the minutes from the last FOMC meeting. We also get the flash Markit PMI’s for the month of February. Some of the US economic data this year has been a tad mixed, however Purchasing Manager Surveys remain robust. It will be interesting to see if the tone of the minutes reflects this view. Neither bond nor equity markets will like to see are the possibility of inflation creeping higher and economic growth weakening. That will put the Fed in a real dilemma.

Average earnings and unemployment will make headlines in the British press on Wednesday. The unemployment rate is expected to remain at 4.3%, average earnings are expected to creep up to 2.5% from 2.4%. A higher jump than this could put more pressure on the Bank of England to raise interest rates again.

Posted on February 20, 2018 .