Equity markets have had a fairly uneventful week as they showed little reaction to the release of the minutes of the Federal Reserve and the European Central Bank, both suggesting that neither bodies are in a hurry to tighten monetary policy. Indeed, the European Central Bank hinted at taking further action in September should economic growth not pick up, according to the Financial Times. As the summer draws towards a conclusion, compared to some years it has been a fairly peaceful one, so far. To illustrate this point, the Vix index, which reflects the cost of hedging an investment portfolio, closed this week at 11, about as cheap as it gets. Depending on one’s point of view this either suggests confidence or complacency in the outlook for equity prices.
We highlighted the latest Merrill Lynch fund manager survey which suggested portfolio managers remain cautious of equities, but not quite as cautious as they were in the previous survey. The same can possibly be said for the retail investor if the AAII retail investor survey is anything to go by. Optimism is at a five week high, as one in three of those questioned were bullish for equity prices in the coming six months. However, this reading remains below the historic average.
As the Brexit impact debate continues, this week we get the second estimate for the UK’s second quarter GDP on Friday. Ahead of that on Tuesday we get CBI industrial trends. Estimates are for economic growth year on year to come in 2.2%, up from the previous estimate of 2%. Despite many sterling bears, at 1.31 the Pound continues to remain remarkably stable to the US dollar, and likewise to the euro. The latest consequence of Mark Carney’s actions at the start of August, according to Saturday’s Financial Times, is Banks starting to charge large institutions to hold money on deposit. This may well be the intension as it encourages investment rather than saving.
After the minutes of the last Fed meeting this week the annual gathering of the Federal Reserve at Jackson Hole takes place. Each year since 1978, the Federal Reserve of Kansas has sponsored a symposium on important economic issues facing the global economy. One assumes in this current environment they find plenty to discuss. Those in attendance are central bankers, finance ministers, academics and others from within the financial world. This year’s topic “designing resilient monetary policy frameworks for the future”. Answers on a post card please. During the week the participants will have plenty of US economic data to focus on, including durables goods orders for July, Markit flash Purchasing Manger survey readings for August. The week concludes, as it does in the UK, with the release of the second estimate for the second quarter GDP.
The other meeting of heads of state that is likely to make news headlines this week is the one taking place between, Angela Merkel, Francois Hollande and the Italian Prime minister Matteo Renzi to discuss Brexit.