See the Wood for the trees

The first week in June saw a recovery in equity prices as the S&P 500 rose over 4% on the week. The gains were driven by rising expectations the Fed will cut interest rates, if not in June then almost certainly in July. Alongside this the hope that the US may not introduce the Mexico tariffs on June the 10th.  The US dollar fell on the increased speculation about what the Fed might do next. Although the yield curve remains inverted between the three month and 10-year maturities, the inversion reduced modestly. The curve steepened slightly between the ten and thirty years. The FTSE 100 was dragged higher by the improvement to sentiment, climbing over 2%. The Vix index, or "fear and greed" did fall on the week. However, rose on Friday despite the continued gains in US equities, suggesting that some investors feel we may not be out of the woods just yet. Another possible note of caution, the Russell 2000 index of smaller companies continued to underperform the broader index.

Neil Woodford's woes continue to make headlines, as he looks to restructure his portfolio. The idea of placing a gate on an investment fund is permitted; one must wonder how many unsophisticated investors were aware this was a possibility and understood the concept. As we saw in 2007, and not wishing in any way to make comparisons with the near collapse of the banking system during that time, the Telegraph highlighted how one isolated event could have broader implications. The article suggests that Hargreaves Lansdown could be forced to prevent withdraws from some of its multi manager funds that hold stakes in the suspended Woodford fund. Hargreaves denied it would have to suspend funds due to the "minimal level" of redemptions. If investors do look to redeem other positions and portfolio managers are further forced liquidate holdings, this could distort the performance of stocks.

Looking to the week ahead, the UK will be dominated by whom could be the next leader of the Conservative party. Aside from that, we get a raft of economic data from most parts of the globe. The US will be publishing inflation rate, retail sales, industrial production and flash Michigan's consumer sentiment. Should any of these data points vary from analysts' expectations, the market reaction will be interesting. Will misses reinforce the hope the Fed will cut rates and possibly further boosts stocks? Alternatively, maybe not. The UK unemployment, wage growth and GDP. China will also be in focus with foreign trade industrial production and retail sales.


Posted on June 9, 2019 .