In a very quiet week for financial markets, with thin volumes traded, most equity markets were down over the week as investors wait for Janet Yellen’s speech, Chairperson of the US Federal Reserve, at the Jackson Hole Symposium on Friday, looking for clues as to the future path of US interest rates.
The S&P 500 fell 0.5% as Stanley Fischer, vice chairman of the US Federal Reserve, very much at the hawkish end of views, i.e. in favour of monetary tightening, gave a speech last Sunday pointing out that core inflation is within touching distance of the Fed’s 2% target, whilst employment growth has been robust. In Mr Fischer’s eyes, this is no mean feat in an environment where the US economy has had to dodge a number of potholes over the past two years including: The Greek debt crisis; the 20% appreciation of the trade weighted US dollar; uncertainty over Chinese exchange rate policy; periods of extreme financial market turbulence; dismaying jobs growth in May of this year; and of course Brexit.
Despite this speech, most investors remain doubtful that Janet Yellen will provide any further clues as to the timing of the next interest rise, as she prefers economic data to do the talking. As Mr Fischer pointed out in his speech, US productivity growth has averaged only 1.25% in the period from 2006 to 2016 versus an average of 2.5% from 1949 to 2005. If this were to continue, it would have profound implications for markets and policy makers.
Markets are currently only pricing in a 32% probability of a September rate rise, any comments to the contrary have the potential to shake markets out of their current state of calmness.
The Japanese Topix index fell 0.6% over the week as data out on Friday showed that Japan continues to battle with deflation as core CPI fell 0.5% year-on-year for the month of July. This is the lowest reading since March 2013 and the fifth straight month of price deflation. Expectations for further monetary action from the Bank of Japan have increased yet again.
In a week that central Italy suffered a tragic earthquake with at least 268 known to have died at the time of writing, European equity markets were slightly up, with the Eurostoxx 50 recording a small gain of 0.3% as of midday Friday. The flash August composite purchasing managers’ index for the Eurozone signalled continued steady expansion in the third quarter. However, there is a sense that the impact of Brexit has yet to be felt and confidence among German businesses weakened for the second month in August.
Similarly, the immediate impact of Brexit on the UK economy has been more muted than the naysayers had suggested, with early indications pointing to a slowdown but by a smaller margin than expectations. British manufacturers order books as reported by the Confederation of British Industry, continued to contract for the sixteenth straight month in a row, but by a smaller amount than predicted by economists. Sterling subsequently rallied to over $1.32, the highest level for three weeks, before dropping back just below this level by Friday. This still represents a 10% fall in the value of sterling since the vote to leave the EU, which will have a significant impact on consumers in the months to come. The FTSE All Share closed down 0.2% as a strengthening pound reduces profits for international companies listed on the London Stock Exchange.
We have made no changes to the portfolios this week.
Very little has changed since last week and we, like the rest of the market, are waiting to see if Janet Yellen provides any clues as to the future direction of US interest rates at her Jackson Hole Symposium speech at 3pm BST today. Market volatility is eerily calm, yet many of the risks that investors have faced over the past year have not gone away. We do believe that fiscal policy will increasingly come to the fore in coming months driven by election cycles and we remain in the words of Michael Hartnett, investment strategist at Bank of America Merrill Lynch, “cynically bullish” on markets which continue to be supported by policy action, but not valuations or fundamentals.