Asking the Right Questions
The major equity indices in Europe and the US moved higher last week while the performance in Asia was mixed. The French CAC 40 equity index was one of the standout performers, up 3.02% for the week, pushing the index back into positive territory for the year. In the US, the S&P 500 capped off the best August in fourteen years, closing at a new record high of 2003.37.
While August was a strong month for equity markets, the insatiable demand for government bonds also showed no signs of easing. The German 10-Year government bond yield fell further, down 9bps to 0.89%! At the same time the spreads on other Eurozone government bonds continued to narrow with the 10 year bond yields in France, Italy, Spain and Ireland declining to 1.25%, 2.44%, 2.23% and 1.78% respectively.
The dichotomy between equity and bond markets can only really be explained by an underwhelming economic recovery, weak inflation and most of all the ever increasing influence of the world’s major central banks. The cacophony of voices is growing louder for the European Central Bank to step up to the plate and embark on a program of quantitative easing. However, against this backdrop even the most ardent of equity market bulls would have to be somewhat wary as we head into September, historically a more challenging month for stock markets.
European equity markets have opened lower this morning following after a worse than expected PMI manufacturing survey added to concern about the trajectory of the Eurozone economy. US markets are closed for the Labour Day holiday.
It is a busy week on the economic front this week. Key macro data includes purchasing manager index (PMI) reports from around the globe, lending data from the UK, industrial production from Germany, and the second estimate of Q2 Euro-area GDP. The US employment situation report on Friday will be keenly watched, with the labour market “yet to fully recover”, according to the Fed’s Janet Yellen.
Also in focus this week will be the monetary policy announcements from the European Central Bank, Bank of England, Bank of Japan and the Bank of Canada. No change in policy is expected at these meetings but the BOJ and the ECB are being asked to do more. In his press conference following the announcement, Mario Draghi will be pressed further on deflation risk and how their work on the purchase of asset backed securities has progressed.