The Week Ahead

The pound modestly gave way to the U.S. dollar this week, which led to a gentle outperformance of UK equities over the U.S.; the S&P 500 finished the week pretty much where it started, while the FTSE 100 rose just over a half a percent. The strongest performance came from the Nikkei 225, as the yen also lost ground against the U.S. dollar, closing the week 1.5 percent higher. As nearly 80% of sales in this country go overseas, the newspapers are full of the impact sterling’s strength has been having on UK earnings ahead of a far busier week for reports from UK companies. 

It is worth bearing in mind that a strong domestic currency is fundamentally a good thing as it is product of a healthy economy. It allows us to buy overseas assets cheaper and therefore reduces potential inflationary pressures. It also helps the government raise capital in the debt markets, as overseas buyers will benefit gaining exposure to the currency. In the short term it affects the reported earnings of domestic companies as they translate the overseas earnings back into the domestic one. These effects are temporary (unless the currency continues to appreciate) and probably offer domestic investors a good opportunity to add to their favourite names. 

Our weekly look at investor sentiment shows a modicum of caution returning to equities in particular. The AAII investor survey reports bulls and bears pretty evenly matched. The Vix, at 12.6 finished the week just about where it started, having traded as high as 13.5 in the week and as low as 11.5. Fund flow data saw money coming out of equities and high yield bonds, while government bond funds continued to attract capital. U.S. 10-year treasury yields remain below 2.5% and according to Merrill Lynch, and Investment Grade bonds have seen 31 weeks of net inflows and are now showing signs of being a crowded trade. By the end of the coming week the bulk of the S&P 500 companies will have reported. So far earnings show a beat ratio of 69.4% and revenue beat of 63.8%, suggesting once again that companies are finding ways to eek out productivity gains. 

On the macro front, the week ahead will see a lot of euro area data ahead of the next ECB rate meeting the following week. On Tuesday we get July’s business and consumer confidence data along with industrial and economic sentiment data. On Wednesday the euro area June unemployment rate is released, as well as the July's inflation data. In the U.S., the focus will probably be on the employment data later in the week, as investors continue to try and second guess when the Fed will move on interest rates. After the recent rise in the U.S. dollar it will be interesting to see if this trend continues in the coming weeks and the impact it has on US equities.

http://uk.virginmoneygiving.com/team/LucyandDad

Posted on July 28, 2014 .