Wrap up – last week

Sentiment improves and equities hit multi-month highs

Confidence returns to equity markets

Investors remained calm and confident last week helping equities hit multi-month highs: in thin trading volumes the S&P 500 held above the 1,400 level close to a four-year high, the FTSE Eurofirst 300 notched up its eleventh successive week of gains and the Nikkei 225 closed at a three-month high.

Macroeconomic data was mixed but investors were unruffled, choosing to focus on the more positive numbers such as better-than-expected growth figures in Germany; growth in industrial production and an unexpected rise in consumer confidence in the US and a lower unemployment rate in the UK. Expectations of additional stimulus by global central banks remained strong, helped further by comments from the Chinese premier, minutes of the latest Bank of Japan meeting, and near the end of the week, by the remarks of Angela Merkel lending support to the efforts of the European Central Bank in tackling the debt crisis. Brazil’s announcement of a $66bn stimulus package was welcomed by the markets and helped support emerging markets and some commodities. In company news, Cisco Systems cheered investors raising dividends by 75%. As further evidence of the tranquillity in the market the CBOE Vix index, measuring expectations of short term volatility, fell to a five-year low.

Investors reduced positions in safe haven assets such as US Treasuries and bunds, while both Spanish and Italian government bond yields fell (prices rose) as investors began to buy their debt once again. In the case of Spain the fall in yields was more dramatic in shorter maturities: 2-year yields fell from 6.3% in July to 3.6% by the end of the week.

Shaping the markets — this week

Fed minutes to come under the microscope in an otherwise quiet week

Contrary to last week, this is a ‘data light’ week on both sides of the pond. In the US the main feature of the week will be the release of the latest Federal Reserve (Fed) meeting notes, which will be scrutinized from all angles for signs (and timing) of further Fed easing. Staying with the US, existing and new home sales data should show a slight improvement (forecast to rise 3% and 4% respectively), but initial jobless claims are likely to have drifted higher. Durable goods orders due at the end of the week are likely to have risen by 2.5% in July after a gain of 1.3% in June.

In Europe, Purchasing Managers’ Indices (PMIs) for August are due on Thursday and given the rise in sentiment lately both the manufacturing and services sectors are expected to show an improvement —although are likely to remain in contraction territory (under 50). Other data awaited this week are the breakdowns of second quarter gross domestic product (GDP) figures for the UK and Germany, which should shed further light on domestic and external demand in the respective countries. In the UK, since the release of the initial GDP figure, actual industrial production and construction output for June have been released, which according to some analysts will see a correction upwards in the GDP figure to -0.5% quarter on quarter.

Elsewhere, in Japan the July trade balance data will be released — expectations are of a weak trade balance picture, but one with a moderately improving outlook.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1418.16

0.9

12.8

Dow Jones Industrials

13275.20

0.5

8.7

NASDAQ Composite

3076.59

1.8

18.1

FTSE 100

5852.42

0.1

5.0

Euro STOXX 600

272.83

1.1

11.6

Nikkei 225

9162.50

3.1

8.4

Hang Seng

20116.07

-0.1

9.1

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.79

17.4

-9.0

UK Gilt – 10 year

1.67

13.2

-30.7

German Bund – 10 year

1.52

13.4

-31.2

Japanese JGB – 10 year

0.83

3.8

-15.4

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.17

8.7

-79.4

ITRAXX Crossover 5 Year (MID)*

579.74

-11.1

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

13.45

-8.8

-42.5

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

115.87

2.7

7.0

Gold Bullion $/ Troy Oz

1616.35

-0.3

2.7

Currencies

vs $

vs £

 

¥

79.51

124.6

$

1.57

Euro

1.230

1.273

Source: Datastream. * Spread in basis points. Past performance is not a guide to future performance.

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