Another good week for equity markets in the face of a continuation of mixed economic data. Hopes that a successful conclusion to China trade talks aiding investor sentiment. The Vix index fell again this week as investors, at present at least, take the view that we are back in the low volatile world supported by the Federal Reserve. The next test will be to see if the S&P 500 can break through 2800, something the index has resisted since last October. Looking at the underlying performance of some sectors and indexes over the past week. The S&P 500 underperformed the Russell 2000, Industrials underperformed the broader index and value outperformed growth.
Sterling held onto the gains made during the week, as the results of the parliamentary votes unfolded, culminating to a delay beyond the 29th and possibly indefinitely. This coming week Theresa’s deal goes to parliament again. As Theresa May’s deal is voted on for the third time, the backlash to parliament’s apparent attempt to interfere with a democratically reached decision is increasing. This may be her best hope for getting the deal through as Europe’s price for an extension becomes too high. If this is the case and the threat of not delivering on the Referendum becomes the rallying cry for the Conservative party, sterling could again come under pressure.
The performance of the stock market will be dictated by when we get the next economic recession. Analysts are constantly trying to look at the data to find the answer. Oxford Economics believes the odds of a recession remain below the threshold we breached before the past seven recessions. Having said that the Activity Augmented yield curve probability has now risen to 44% in the coming six months.
The big event of the week ahead, aside from more Brexit activity, will be the release of the latest Federal Reserve interest rate decision. There is no expectation that the Fed will raise interest rates, it will be more about what they say about the state of the US economy and how they stick to the dovish tone set at the start of the year.
The Bank of England likewise meet this week, again no expectation of an interest rate change and again the accompanying tone following the announcement will be the focus.