Another volatile week for equity markets, capped of on Friday by the last piece of major data that could influence the Federal Reserve ahead of its rate setting meeting on September 16th and 17th. The non-farms number reported 173,000 jobs created in August, below expectations, the unemployment rate fell to 5.1%, also below expectations. The jobs creation data could well be revised, so this data may offer more for the hawks than the doves.
Equity markets in Europe and the US had a bad week but if one were to take some encouragement from last weeks fall, the Vix finished the week close to where it started it. This would suggest fear has stabilized. Two year US treasury yields hardly moved all week, as did the Ten-year. The US dollar rallied this week against its basket of other currencies. US equity markets have taken their lead from a rising dollar in the past few years.
Is this a bear market we are entering or a correction after a strong run?
Equity markets as we have said do not like uncertainty as investors sell and ask questions later. The major cause of uncertainty has been what’s happening in China and the impact of a tightening move by the Fed. There also comes a point when markets decide they discount the worst case scenario and consolidate the fall, then look forward to evidence that they have overreacted. Equity markets are a forward-looking asset class.
Investing in stock markets is about the belief that companies can grow their earnings. If investors start to believe that the economic climate will not allow that to happen, that’s when markets fall. There is no doubt that the signs were there for a correction, equity markets had got ahead of themselves, but that argument held for a while.
So have the equity markets discounted enough of the uncertainty to now find a base and continue the rise, or are equities preparing themselves for an earnings recession. The Federal Reserve will only move in September, one assumes, if they truly believe that the economy is in a robust enough position and that a recession is not a likely scenario. On that basis it should encourage equity investors.
Whilst the debate will continue to center about when and if the Fed will act, this week sees the release of the minutes from the last Bank of England’s Monetary Policy Committee meeting, as well as the latest rate decision. No change is expected to interest policy on Thursday, the minutes may reveal if the Bank of England are likely to move before the middle of next year. On Wednesday we get month on month and year on year manufacturing and industrial production data for July.
For the US it’s a quieter week, in Europe on Tuesday the latest second quarter GDP estimate. China releases on Tuesday the latest import export data for August; this report will make headlines on Tuesday morning.
This week may well be a determinant as to whether equity markets have corrected enough; the lack of volatility in other asset prices should provide some comfort. Sentiment towards emerging markets is bearish enough for some analysts to believe markets could recover. Last week saw inflows into equity funds of 10bn dollars, the largest in 8 weeks, suggesting someone is feeling a little more hopeful. A stronger performance from Asian markets overnight on Sunday, helped Europe at least start the week on the right foot.