After another shaky start to the week, equity markets recovered on Tuesday ahead of the 4th of July holiday in the US. A combination of a turn around for US markets later in the day on Monday, an easing of trade tensions along with Germany reaching a deal on migration all helping sentiment. A deal that should help Angela Merkel cling to power by holding her coalition government together. The S&P 500 index started the year at 2700, has traded between 2600 and 2800 in that time and is now back to 2700 again. The FTSE 100 has hit record highs, fallen almost 10% and is back almost where it started the year.
What to look forward to for the second half of the year? It is always tempting to predict what is currently occurring will continue. Most fund manager surveys tend to report the current risk is the one they most fear, or what is on the front page of the Financial Times the day they complete the survey.
Of the current risks, greater friction within Europe, Trade wars, US policy mistake, China slowdown, the recession led by a rise in the oil price. Which is the one or one’s investors should fear? All have the potential to cause a major disruption. The likelihood is probably none of the above, we have earnings season coming up which may cause some volatility.
We are now entering the period of summer holidays, tight books, Wimbledon, Henley and the Open golf. Stock markets have historically traded sideways in the summer months. Some analysts who have studied season movements appear to find a positive correlation with the markets and the holiday season. As the holiday period approaches something of a rally and then a lull as markets suffer the post-holiday blues. It seems to work well around Christmas time, but that is probably more correlated to fund managers boosting performance into the year-end.
The most noteworthy event of the day was probably the continuation of the narrowing of the gap between the two and ten-year treasury yield to 30 basis points. For choice investor sentiment remains cautious, with the current headlines making the airwaves this is hardly a surprise.