The Conservatives surprise victory not only gave UK equities a boost, but also equity markets around the globe. The strong end to the week meant that aside from the Nikkei, all the major developed markets finished marginally higher than they started the week. Ahead of the election many commentators, including ourselves, were pointing out how sanguine the UK bond, equity and currency markets were behaving. In the end the markets were right.
Bond markets have had a volatile time recently as yields have been rising, we did express the view that equity prices would stabilize as and when bond prices did so. That proved to be the case as US treasury prices finished the week close to where they started it. On Friday equities and bonds were encouraged not only by the UK election result, but also an encouraging non-farm pay roll report.
Merrill Lynch’s recent fund manager surveys have suggested that a combination of weak commodity prices and election uncertainties have meant fund managers have remained underweight UK equities. It may well be that now the uncertainty over the election is out of the way, and commodity prices have recovered that fund managers may well look rebalance UK equities in their portfolio.
The weekly flow data recorded a lot of risk capital being taken of the table in the past few days, particularly from equities but also high yielding bonds. Last week saw just over $17bn being withdrawn from equity funds.
After the excitement of last week money managers can go back to focus on the some of the other issues that have been occupying minds in the previous months. Talks resume on Monday between the rest of Europe and Greece to see if they can once again resolve its debt issues, as the Greek treasury reveals a cut in expectations for growth to just 0.8% for the year ahead. Equities on Monday may get another liquidity boost as the Bank of China announced am interest rate cut on Sunday. China’s one-year lending and deposit rates are to be cut by 25bp.
It’s a busy week in the UK for economic data; on Monday we get the latest interest rate decision, no change in UK rates are expected. On Tuesday we get the latest industrial and manufacturing reports for March, expectations are for a small improvement over the previous month. On Wednesday average earnings and March’s unemployment rate along with the latest bank of England’s inflation report. The UK unemployment rate is expected to remain at last month’s level of 5.6%.
For the euro area aside from the ongoing Greek negotiations, on Wednesday we get the latest euro area GDP growth rates. Forecasts are for a year on year growth rate of 0.9% according to trading economics, hopes may that the final figure may beat forecasts. In contrast it’s a quieter week for US macro data, the focus will be on Wednesday’s latest retail sales data.