Trade wars concerns were the latest thing to trouble equity investors, as leading equity indexes had a torrid week. The S&P 500 lost over 5% on the week, the FTSE 100 a similar amount, the Stoxx 300 fared slightly better losing nearer 3%. Fears over trade wars appeared to be the catalyst as central bankers continue to stress that they only intend to raise interest rates at a modest pace. Facebook’s share price fall of nearly 10 pct, this did nothing to help equity sentiment as the FAANG index fell 8%. Weaker than expected Purchasing Manager Surveys for the euro area economy contributed to the general bearish mood. One asset class that seemed to have a decent week was the oil price as US Middle East tensions led to the price rising above $70 a barrel. The price of gold also caught a bid as investors looked to cuddle the world’s largest teddy bear.
A correction had to occur, and although these events are painful one always has to remember they are part of the natural cycle. The Dax has lost 12% from the recent highs and the FTSE 100 is down over 10% from the start of the year. Sentiment has weakened on the back of the correction but studying such indicators as Barron’s investor consensus sentiment index possibly not quite enough for a full flush out.
The Vix index rose sharply on the week, closing above 25. However, one could have expected a bigger move higher on Friday considering the fall in the S&P 500, we will have to see if that bodes well for some consolidation for the week ahead. US ten year treasury yields were largely unchanged on the week, however, the gap between the two and ten year remains close to 0.5%.
America remains an outlier in terms of equity market performance. It is still expensive relative to historical valuations but not nearly as bad as it was. Equities continue to remain attractive to bonds, in our opinion. One could pick at 5 or 6 UK blue chip equities that offer yields in excess of 5%, compared to ten-year gilt yields of closer to 1.45%. The Dax index offers a yield in excess of 3.5% and German bunds just 0.5%.
Looking to the week ahead, the US will be publishing its third estimate for q4 2017 economic growth. For the euro area, there are a series of sentiment indicators for industrial and consumer markets. Towards the end of the week, Chinese Purchasing Manager data will be in focus.