Global equity markets were mixed last week against a backdrop of falling commodity prices and global growth concerns. Much of the focus remains on the timing of US interest rate hikes, with investors meticulously analysing each piece of economic data for clues on how the Fed might act over the coming months.
In Europe, the FTSE Eurofirst 300 closed up 0.53% for the week. The UK’s FTSE 100 was the standout performer, up 1.77%. In the US, the major US equity indices ended the week higher with the S&P 500 up 1.16%. In Asia, Japan’s Nikkei 225 index closed flat, while the dramatic sell-off in Chinese equities continued. Despite the best efforts of the People’s Bank of China and the government to prop up the market, China’s Shanghai Composite Index of mainland shares fell another 10% last week. .
The much quoted CBOE Volatility Index (VIX), a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, closed the week at 12.12, down -11.79% for the week and -36.88% YTD, close to a record low despite an increasingly uncertain backdrop.
While there has been a lull in equity market volatility, we have seen much more volatility in the fixed income and FX markets. Government bond yields moved lower across the board last week, as the decline in commodity prices fed into concerns about global growth. After a spectacular jump in yields since April, government bonds have recouped some losses. The German 30-year bond yield closed at 1.32% on Friday, down 29bps over the past month. Peripheral bonds also tightened sharply, following the near term patchwork on Greece.
A crucial part of the recovery story for the Fed has been the improvement in the labour market, with the US unemployment rate now standing at 5.5%. However, the Employment Cost Index released on Friday by the Bureau of Labor Statistics showed a much lower than expected quarterly increase in US wages; 0.2% versus an expected 0.6% and the slowest quarterly growth rate since records began in 1982. This would suggest that wage growth may not be following the growth in employment as hoped. In response, the US dollar weakened and bond yields fell, a sign that this report could cause the Fed to push out the timing of their first rate hike.
Closer to home, the latest quarterly GDP data showed the Irish economy grew a spectacular 6.5% from a year earlier, far and away the fastest growing economy in Europe. However, a decision by Eurostat that Irish Water will have to remain on the State’s balance sheet amidst concerns raised about its commercial status, stole the limelight. The current government is drowning in failure when it comes to the implementation of a single water utility, an issue that could be their downfall in the next election.
European equity markets have opened marginally higher this morning following a mixed session in Asia overnight.
Key macro data includes purchasing manager index (PMI) reports from around the globe. In Europe, the key reports this week are on inflation, retail sales and unemployment. In the US, the employment situation report will be keenly watched on Friday, providing an update on the labour market, a key indicator for US monetary policymakers.
On the monetary policy front, the Bank of England (BOE) and the Bank of Japan (BOJ) will both hold their monetary policy committee meetings, with no change in policy expected from either bank. The Bank of England will also release the minutes from the June meeting and the latest quarterly Inflation Report, which sets out detailed economic analysis and inflation projections used in the decision making process when setting monetary policy.