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  • Stocks had a pretty good week, with most global markets in positive territory. In keeping with the theme of the last month, central bank activity dominated market direction. US Fed Chair Yellen’s testimony before Congress had some accommodative undertones, which helped both bond and equity markets. This week the main focus will be on corporate earnings as well as central bankers (of course) with the European and Japanese banks both meeting.

    Last week

    Strong week for stocks

    Bond markets steadied

    Fed Chair Yellen calmed markets

    UK unemployment dropped to lowest level in 42 years

    Carillion crumbled

    Chinese economic data was decent

    US earnings season off to a decent start

    This week

    US earnings season continues with 69 of the S&P 500 companies reporting this week

    UK inflation data on Tuesday – expectations are for a drop to a 2.8% rate from 2.9%. Retail sales data on Thursday

    Eurozone core inflation on Tuesday along with Economic Sentiment Survey (ZEW)

    ECB bank meeting and interest rate announcement. No action expected. More interesting will be President Draghi’s comments in the Press Conference. 

    Bank of Japan interest rate announcement and outlook report on Thursday.

    Last Week's Highlights

    Equity markets were generally strong last week with Emerging markets leading the way. The UK market was slightly down, held back by a strong pound and some weak performance from big healthcare companies as well as consumer names. Globally, Technology and Materials were the best performing sectors, with Banks and Financials giving up some recent gains as market interest rate expectations were revised downwards. 

    Bond markets were steady last week; having been pretty choppy over the last month. UK government bonds were up for the first time in three weeks as rate hike expectations were dialled down. High Yield bonds were up over 0.5% on the week and Emerging market bonds were the stand-out; up almost 2% on the week. 

    Fed Chair Janet Yellen’s semi-annual testimony to Congress was one of the key events of the last week. Following two weeks of fairly confusing chatter from central bankers which has leant towards policy tightening, markets were cheered by Yellen’s accommodative tone. She noted that “the federal funds rate would not have to rise all that much further to get a neutral policy stance” and that the low level of inflation did not just reflect transitory factors and “that there could be more going on there.” This caused bond markets to rally as rate hikes were less aggressively priced in. Having begun the week expecting the Fed to raise rates again in December (for the fifth time in two years), markets ended the week expecting the next Fed rate hike in March of next year. 

    Yellen’s caution over inflation was highlighted in the weak inflation prints in the US towards the end of the week. Core CPI came in at 1.6% year-on-year (dropping from 1.9% in May) and PPI (ex food & energy) came in at 1.9% year-on-year, down from 2.1% in May. Further caution on the US economy came as Retail Sales badly missed estimates; contracting 0.2% on the previous month versus estimates of a 0.1% rise. 

    UK unemployment clocked in at a rate of 4.5% last week – the lowest it’s been since 1975. However, real wages are still falling due to the high inflation rate (of 2.9%). Average real wages fell 0.7% on the month, with the Office for National Statistics (ONS) showing that disposable income per person was 2% lower in the first quarter of 2017 than a year earlier. They also forecast that the average UK worker will earn less in 2021 than in 2008. 

    Carillion had a calamitous week and dropped 70.77%. This came following a profit warning, missed debt reduction targets and an announcement that Richard Howson was stepping down as Chief Executive. It has been one of the UK government’s biggest contractors and is the biggest manager of military bases for Britain’s Ministry of Defence. Carillion is faced with rising debt and a £663m pension deficit which dwarf its market capitalisation; of £241.6m as at the close of play on Friday. 

    The week finished with Chinese economic data which came out better than expected. The second quarter’s growth (GDP) number came in at 6.9% (vs 6.8% expected). In addition to this, Retail sales (+11% vs 10.6% expected) and industrial production (+7.6% vs 6.5% expected) also came in strong. This helped offset losses in Chinese markets which stemmed from rumours about an increase in financial regulation which came out of a central bank (PBoC) conference over the weekend. 

    US earnings season got off to a decent start with some good numbers from the banks. JPMorgan, Citi and Wells Fargo all beat expectations of sales and earnings; although all of the expectations had been revised downwards over the past few weeks. 

    Asset Returns

    Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

    Carillion dropped over 70% last week following a profit warning and concerns over rising debt levels


    ​​Source: Financial Times / Thomson Reuters Datastream