US equity markets had a good week as investors expect the Fed to announce a cut in interest rates this week. This along with an earnings season that is modestly beating expectations, overall, with just about half the S&P 500 having reported. Although, according to Factset, companies are still on track to deliver a decline of 2.6% in aggregate earnings year on year. The valuation now put on US equities is 17.1 x earnings. The lack of earnings growth and the rise in equity prices has seen an upward rerating of equities once again above its 10-year average of 14.8x.
US bond prices have moved modestly this month, leading to a modest steepening in the yield curve; however, the 3-month yield remains above that of the ten year. Suggesting the bond market continues to expect an economic recession in the coming six months. According to the Financial Times, about one-third of the global government bond market and one-quarter of the global aggregate bond market have negative yields. Partly explaining the higher valuations equity prices trade on and why equities rally despite a lack of earnings growth. Relative to bond yields in Germany and Japan-US treasuries remain attractive.
There is now a real sense developing amongst the young, who have seen little else than zero or near-zero interest rates as they grow up and enter the working world, will assume that this is the "new norm". It is understandable. That is worrying everything is cyclical just some cycles last longer than others. Something will break this cycle; at present, it's hard to pinpoint what it will be.
Looking to the week ahead, there will continue to be a high-profile selection of companies reporting, Procter and Gamble, Apple, Royal Dutch, to name a small selection. The real focus will be on the Federal Reserve this week and the expected cut in interest rates. Capital markets now expect a 25-basis cut this week rather than the 50 basis points forecast a few weeks ago. The Fed is not the only central bank meeting this week. The Bank of Japan and the Bank of England also announce interest rate decisions. Unlike the Fed neither are expected to change policy. There is a raft of economic data this week, including Purchasing Manager Surveys, Eurozone second-quarter growth estimates. We also get inflation data consumer confidence for the region.
The new prime minister is putting the heat on Brexit as the cabinet are apparently preparing for a "no-deal "scenario. A combination of a stronger dollar this week and these Brexit uncertainties continues to put pressure under the pound.