Hardly surprisingly, with all current uncertainties from Brexit to US interest rates it was a volatile week for equity markets. The week ended with leading developed equity indexes falling between 1 and 2%. Faring slightly worse, another strong week for the Japanese yen led to the Nikkei 225 index of leading Japanese shares falling 6%. The release of the Merrill Lynch’s latest fund manager survey continues to indicate investment managers remain very cautious of equity markets. Currently portfolio managers hold nearly 6% of their portfolio in cash, the highest since November 2001. Equity allocations have dropped to a four-year low.
The weekend Financial Times reported that UK stocks suffered their second largest withdrawals on record ahead of the referendum on Thursday. The eighth consecutive week of outflows. For those who believe negative sentiment is positive for market performance would be encouraged by this lack of optimism.
The weekly American Association of Individual Investors likewise records a considerable amount of nervousness to the outlook for equity markets, only 25% of those polled thought the US equity market would be higher than where it currently is against a historical average 0f 38.5%.
The Vix index closed the week roughly where it started it, just below 20. We did believe at the start of the week the index could rise above 20, which it duly did coming close to 23. With a couple of exceptions in the past few years a move above 20 has signalled a rally in equity prices.
Central banks were in focus in the past week, as we had rate announcements from the Federal Reserve, the Bank of Japan and the Bank of England. The Federal Reserve left rates where they were, on Thursday May’s US year on year inflation rate came in at 1%, just below expectations. One has to wonder if the Federal Reserve would be happy for the inflation rate to remain currently where it is in the prevailing economic climate. A spike in the inflation rate with no real pick-up in economic growth would put the members in a real dilemma.
Looking to week ahead the focus in the US will be homes sales on Thursday and durable goods orders on Friday, that is of course ignoring the small matter of Thursday’s vote. Despite the opinion polls suggesting the leavers are taking an upper hand, bookmakers still believe the remain campaign will win. Unlike the general election there will be no exit polls to give an early indication of the outcome. Results should start to come in around midnight, with a conclusive result anticipated to be around 4am.