The Week In Hindsight, 14 July 2014

While investors have been discussing low volatility and the impending feeling that a correction could be near for weeks and months; very few, if any, would have imagined at the time that the cause of such a correction would be a debt default by one of peripheral Europe’s largest listed banks.

Last week this arrived to be the case when the parent of Banco Espirito Santo delayed repayment on a number of its debt payments, leading Portuguese regulators to suspend the group’s shares from trading. While the market has long held concerns over Banco Espirito Santo, the events of last week were enough to reignite concerns surrounding European financial institutions on a broader basis.

Some would also say that it serves as a timely reminder to all investors that risks still exist to global financial stability and growth. European indices fell in response to the news, with the FTSE 100 closing down nearly 2% on the week.

Elsewhere in the world, FOMC meeting minutes released on the Wednesday evening appeared to highlight a resolute determination among policy makers to wean the US economy off of the Federal Reserve’s record stimulus program before year end. The market reaction to this was mixed against the backdrop of reawakened concerns over Europe.

On a slightly more positive note, the Markit Global Business Outlook Survey was released on Monday.

The survey highlighted the UK economic outlook as being the most positive among G4 nations, while also airing some concerns among business leaders over weakening global price pressures, and the potential damage that could arise if developed market central banks are shepherded into premature interest rate rises.

Concerns over weaker prices and monetary policy come just as another earnings season gets under way in the UK and the US. While we are not greatly concerned about the present weakness in consumer prices across developed markets, given stagnant wage growth of recent years, we do view such a dynamic as negating the need for higher rates in the near future.

Under the traditional theory; only when inflation readings show signs of a sustainable return to, or above, target rates would it be appropriate for central banks to take action. Any movement in policy rates ahead of this time would place a still fragile recovery at risk. Consequently, we expect monthly inflation numbers to remain key to price action across markets throughout the months ahead.    

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The week ahead;

Going forward into the immediate future, this week sees UK inflation numbers for June released on Tuesday morning. The official forecast is for a minor rebound to 1.6% from the current level of 1.5%, however; actual numbers have surprised to the downside on a number of occasions this year.

Given the current deceleration in price pressures across developed markets in general it is possible that this Tuesday’s figure will also undershoot forecasts.

Later in the week, unemployment figures for June are expected to highlight continued momentum behind a recovering labour market. The ONS forecast implies a further reduction in the UK unemployment rate from 6.6%, down to 6.5%.

Over on the other side of the Atlantic, Tuesday evening sees Janet Yellen go before Congress once again to to provide her semi-annual monetary policy testimony to lawmakers. It is likely that during the testimony she will repeat previous guidance as to the likely timing of the “final taper”.

While it is likely that lawmakers will push for further information on the US interest rate outlook, we do not expect any new information to be forthcoming in response to this question.

Onward from here, US retail sales figures for June are also due on the Tuesday with a minor rebound from the previous month’s lows anticipated.

FTSE 100

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DOW JONES 

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