The risk rally continues as New Zealand’s rate cut this week took the tally to 667 cuts by central banks since the financial crisis. Falling bond yields continues to add to the attraction to equities. The Bank of England has now started to purchase bonds in the open market. Liquidity looks like becoming an issue for the Bank as they failed to purchase the number of government bonds they tendered for. Other unintended consequences of the QE program are the tightening of the corporate bond market. Investors have looked to buy corporate bonds to enhance their income, now they have to compete with the government, traders will be reluctant to sell as they know supply will remain short.
Sentiment towards equities did improve slightly as equity funds saw net inflows over the past week of $6.5m. The Vix index finished the week at the very bottom end of its trading range. The AAII retail investor sentiment bull index closed at 31, above recent lows but remains below the long term average of 38.
The weekly US economic data of the past five days continues to offer a mixed picture, on the one hand the jobs data remains robust, however productivity and producer prices remains subdued. This week we get the monthly inflation report as well as the minutes of the last months Federal Open Market Committee meeting. There was some speculation that the committee might look to raise rates at the last meeting, not least from ourselves. On Wednesday we might find out how close they came.
This week we also get UK inflation data for the month of July, later in the week unemployment, average earnings and retail sales. A bit of something for everyone. Ahead of Brexit predictions were that inflation would rise as the fall in the pound would increase import prices. It may be too early to see the real impact of the fall in sterling, however the predictions of a run on the pound has failed to materialise so far. Forecasts are for inflation to rise by a meagre 0.5% year on year in July, an unexpected jump may lead to some speculation that the Bank moved too quickly to act on rates this month.
This week in Europe we have the rate setting meeting of the ECB on Thursday, ahead of that on Tuesday we have the German ZEW economic sentiment survey. There was a sharp unexpected fall in sentiment in July, probably on the back of the Brexit vote. Expectations are for a small pick up this month.