At the beginning of last week, following a 1.7% sell off in the FTSE 100 in the previous week, we felt that enough fear had gripped risk assets and this could lead to a possible stabilisation of equities in particular. This appeared to be the case as the FTSE 100 regained 1.9% over the past week, while the S&P 500 also rose 1.2% and the German DAX increased 0.9%, despite some mixed economic data particularly from the euro area. The Nikkei 225 was the strongest last week with a 3.7% increase despite the weak GDP report. The Vix fell on the week now back below 13 suggesting once again a degree of confidence returning to equity investors.
Continued geological concerns along with the mixed economic data led to a continued fall in bond yields as the 10-year US and UK treasuries saw yields fall to 2.34% and the yields across European treasuries reached record lows. Global political tensions did not provide enough worry to push oil prices up, which were little changed on the week, despite volatility on Thursday and Friday. Gold prices were also flat for the week.
In an unusual change from tradition, the recent fall in asset prices has led to sentiment indicators suggesting that investors have become somewhat more optimistic. The consumer sentiment indicator, a poll run by the American Association of Individual Investors (AAII), completely reversed from last week to show almost 40% of respondents are now positive on the market’s growth for the next 6 months versus 31% from last week; this is now above the long-term average for the first time since the middle of June. Fund flow data, which saw large out-flows in the previous week from high yield and equity funds, seem to have stabilised according to Merill Lynch as $2.8bn went into equity funds. As another sign that investors are still happy to buy bonds despite record low yields, so far this year, again according to Merill Lynch, investment-grade bond funds have attracted greater in-flows than equity funds, $104bn against $74bn.
This coming week the focus once again week will be on central bankers as the elite gather in the US for the Federal Reserve’s annual symposium on Friday. This event will host speeches by Federal reserve chairman Janet Yellen and ECB President Mario Draghi as the pair face very different questions; the former addressing the possible timing of a rate-rise, the latter facing the possibility of some form of quantitative easing. The economic diary also comprises of consumer inflation reports for the UK and US on Tuesday, the release of the Bank of England MPC minutes, when we see whether any members voted for a rate-rise at the last meeting, and the Fed FOMC minutes on Wednesday, as again economists will be looking for any indication for dissent amongst the ranks. On Thursday the release of the Markit manufacturing sentiment data for China and the Eurozone, expectations were for a small uptick in Europe, but after the recent raft of weaker than expected data these expectations may will have been brought back.
We are just about half way through August and investors will start to be thinking about coming back from holidays and preparing for the final furlong into the year-end. Returns for the year remain mixed. Investors will be hoping for some opportunities to improve those returns.