Another week passes, one which saw three major financial institutions report earnings, JP Morgan, Citi and Wells Fargo and the threat of America raising tariffs on Chinese goods to 200 billion dollars. Once again markets wobbled during the week however by the end of Friday Wall Street had gained over 1%. JP Morgan’s Chief Executive Jamie Dimon reporting earnings that comfortably beat analyst expectations, offered an upbeat picture of the US economy in his post results press comments.
Despite warnings from the likes of UBS that trade wars have the potential to knock 20% of global equity indexes, markets so far seem to be resilient in the face of corrections. Whether this tells you that equity speculators remain prepared for a market correction, when they look to cover some positions there are not the sellers, hence the market bounces back. The S&P 500 recovered to close back over 2800, a mark it last closed above 6 months ago.
The flattening of the US yield curve continues to make headlines as the spread between the two and ten-year US treasury falls below 25 basis points. As we have pointed out in the past, this gains headlines as flattening yield curves are considered a lead indicator for recessions. Although yields on the ten-year US treasury have fallen recently from closer to 3% to 2.85% the bulk of the reasoning for the flattening yield curve has been rising 2-year yields. The one most sensitive to changes in interest rate sentiment. We believe that whilst yields in Europe are manipulated by ECB policy, particularly the German Bund, which remains close to zero, there is little room for US ten-year yields to rise. Therefore, the flattening is more for technical reasons than fundamental ones. This theory will only be proved if, and when, ten-year German bund yields do start to rise.
Looking to the week ahead earnings season will now dominate investor sentiment alongside the tariff rhetoric. Other events that will focus investor attention will be the data from China including second-quarter GDP, industrial production, retail sales as well as fixed asset investment. The UK will publish inflation data alongside produce prices. The inflation data will include wage data and unemployment. As the debate continues to whether the Bank of England is likely to raise rates in the coming months this data may well further influence sentiment.
US investors will focus on Jerome Powell’s testimony to Congress. However, this testimony is unlikely to give up many surprises, one would expect. The speech should just reiterate the Fed remains confident of economic growth, and rates will be adjusted accordingly without trying to dampen growth. Core inflation has risen above the two per cent target to 2.3% in June, however, they expect it to settle around their target of 2% in the coming months.