It was an interesting week in terms of market behavior. We witnessed a correction in the equity market a couple of days ago. S&P 500 fell below 2600 but managed to erase losses by going up to the 2700 level.
Well, it was named “correction”. Someone has woken up the “sleeping beauty” (i.e. volatility).
Outgoing Federal Reserve Chair Janet Yellen said that stock prices are elevated and price-earnings ratios are near the high end of their historical ranges, something that I mentioned in my “From equities to bonds” article. Looks like investors switched from the equity to the bond market: I did expected and do expect such movements during the year. Yields decreased across the developed markets.
Meanwhile, some Fed members are still optimistic regarding the path of Fed fund rates. FOMC member Robert Kaplan in his interview said that three hikes is still the base case for 2018. FOMC member John Williams said that the U.S. economy can handle rising rates. And I still do not believe them.
Elsewhere, German Chancellor Angela Merkel’s Christian Democratic Union reached an agreement with Social Democratic allies. Some guys will get new positions. Local media reported that SPD leader Martin Shultz will serve as foreign minister. This might be good news for France's President Emanuel Macron, who might find some common point in negotiations regarding joint EU budget with Shultz.
And China’s currency fell to around 6.33 after trade numbers were announced. Imports rose 36.9%, whereas market expectation was 10.6%. It seems consumers are spending, and trade balance ended up at $20.34bln level versus $54.65 bln expected.
Today, the BoE kept rate unchanged at 0.5% level, but it increased its growth forecast. Could someone remind Governor Mark Carney about Brexit? Carney still keeps talking about inflation. He said forecasting at the moment will not give correct result, or at least that is what I got from the press conference, and therefore the central bank will assess past performance and see how far it was from its targets.
One more thing, based on the recent news regarding PM Theresa May’s plan on Brexit, services in the UK will be in big trouble. I can understand inflation targeting, but I do not get where the additional growth is going to come from, and that really annoys me.