How sentiment appears to have changed from a few weeks ago, as the rally in developed equity markets continues. A strong week saw equity prices rise over 4% in most developed markets, leading to a recovery of almost 10% from the lows. The credit for the rally in equity prices seems to be largely attributed to the Federal Reserve’s decision to leave interest rates where they were at their last meeting. The following weaker than expected employment data pushing interest rate rise expectations out beyond the year-end. It is worth pointing out that the rally has also coincided with the release of the latest IMF economic report.
The report remained downbeat on emerging markets, however they did refer to an improving developed economy. Critically, in our opinion, they did not weaken their expectations for the Chinese economy from earlier in the year. Encouragingly the Vix index, which is often considered a gauge on the level of fear in equity investors fell below 20. Over the last three years a rise above 20 was considered a contrary buy signal, as sentiment would have been negative enough for equities to rally. A break back below 20 could now be considered a signal that equity markets have seen the worst of the stress.
Sentiment ahead of the rally had become extremely bearish, concerns focussed around the threat of a default or an oncoming global recession triggered by weakness in the Chinese economy. Global equities rallied despite large inflows (over $50bn) into money market funds.
The main focus will now turn to the results season for the third quarter. Alcoa kicked the season of this week with a slightly downbeat report as they missed earning expectations. Alcoa, in its accompanying statement pointed to some slowdown in the Chinese markets contributing to the miss. More bell weather companies report this week, amongst them are Johnson and Johnson, Intel and several of the major US banks, for example JP Morgan.
Looking to the macro data for the week ahead, as is usual there is a constant flow from the US. The focus will probably come towards the end of the week as we get the inflation report for September. The latest beige book report on Wednesday may also gain some commentary. The report is a compilation of anecdotal information on current economic conditions in its of the Federal Reserve districts.
For the UK Tuesday and Wednesday will be the focus as we see the inflation data for September, analysts are not anticipating any pick up in the headline rate. This is despite a pickup in business optimism and improvement in consumer spending. On Wednesday we get on the latest employment and average earnings reports.