As we published Friday’s blog it did feel a little as if we were tempting fate by suggesting equities were holding up the face of some fairly modest macro news, and so it proved the case as the last day of the week produced a broad sell off. Friday’s correction appeared to be driven by a combination of continued worries over what is happening with Greece, along with rumors that the Chinese government was cracking down on share speculation, and some stronger than expected inflation data in the US. All the major developed indexes finished the week lower, the DAX (Germany) having a particularly bad week down over 5%.
On Friday it was announced that the year on year inflation rate for the US economy had risen to 1.8%. The fact that inflation in the US has approached the Federal Reserves target may have spooked equity investors into believing a rate rise was brought closer by this news, but its impact on treasury yields was brief. The 10-year treasury yield rose initially on the news, however by the end of the day yields finished lower then they started the day. The 2-year treasury yield, the most sensitive to changes in rates sentiment, fell on the week. It would appear that bond investors remain unconcerned at the likelihood of a rate rise in June.
The results season continues and on Friday as GE, along with Alcoa considered something of a window on the health US economy, released its first quarter numbers. The figures themselves came in line with expectations, encouragingly the chief executive in his comments on the outlook for the year felt that the company should get to the top end of their expectations for 2015.
Looking to the week ahead, on Sunday the Bank of China announced it was lowering the reserve ratio by 1% to 18.5%. This move adds more liquidity not only to the Chinese economy, and by definition the rest of the financial world.
The UK will continue to be dominated by the upcoming general election; the latest odds continue to show a hung parliament the most likely outcome. Despite what many considered a reasonable performance by Ed Miliband during the week, Conservatives are currently predicted 281 seats and Labour 263 seats (Betfair). Widening of the gap between the two main parties, in favour of the Conservatives. Wednesday sees the release of the minutes from the last rate meeting.
As far as Europe is concerned, on Thursday Markit release the results of its Purchasing managers survey for the month of April, and on Friday the Eurogroup finance ministers meet. Ahead of it hopes will once again rest on the ministers to come too some agreement over Greece’s debt situation. If not Greece will once again be raking round to find the funds to meet its public sector wage bills at the end of the month.
The IMF held its spring meeting on Sunday, and in its communiqué stated they believe the global economy is growing slightly faster in 2015 compared to 2014, but overall growth remains sluggish. They remain vigilant to the risks in asset prices.