Economic Sentiment & Equity Markets

Economics and equity markets are not always closely linked but in Europe what happens in German can have a pronounced effect. Take a look at the ZEW Indicator of Economic Sentiment  in Germany (bottom graph) and how it is closely linked to the German and wider European  Stock Markets (top graph) .

We explore this and a few other areas in our Weekly Round Up on our website 

Volatility and the FTSE-100

We have previously looked the how low volatility can be a good "contrarian" indicator where low volatility suggests that investor sentiment may be too buoyant (When High Risk Can Mean Low Risk). 

Well the last couple of weeks we have seen volatility on the rise for the FTSE-100 as the widely watched UK Index declined. 

You may notice the almost mirror image - well if we overlay FTSE 100 with the Volatility Index (turned upside down) you can see the similarities and we will wait to see if the FTSE 100 follows volatilities lead.

Tough Times for Food Retailers

The top graph shows how Tesco, Morrison’s and Sainsburys have been having a pretty tough time—Tesco had already been suffering after their announcement faux pas -  however was the always likely? The lower graph is an extract from a review that we undertook on the sector in March and shows how total net profits for the sector were in decline after 4 years or growth (red bars) even more worrying is the blue line that shows the net profit for these companies in the sector weighted by their market capitalisation i.e. more emphasis on the larger firms.

US Inflation and Treasury Inflation Protected Securities (TIPS)

An interesting little bit of research that we looked at this morning.

US "breakeven" rates of inflation are used to gauge investor expectation of inflation and are calculated as the yield on a conventional US Treasury less the Yield on an Inflation Protected Treasury (TIPS) of the same maturity. 

Currently 5 year inflation expectations are: - 

• Yield on 5 Year Treasury = 1.76% 
• Yield on 5 Year TIPS = 0.054% 
• Breakeven/Inflation Expectations = 1.76-0.054 = 1.706% 

This is telling us that the current 5 year implied rate of inflation is expected to be 1.706% in the US; if we then look at history we can see that over the long run inflation has tended to be a bit higher. 

So if we were to see a reversion to mean of US CPI (inflation) which is higher than the expected inflation of 1.706% then this may be positive for TIPS. Of course in the World of QE and financial repression these indicators could give conflicting signals for some time - never the less it will be interesting to see.  

Please note this is just a review of market conditions and is not a recommendation!! 

Strong US Dollar No Fun for Emerging Markets

Look at the graph below - the strength in the US Dollar has historically resulted in negative returns for the Emerging Market and BRIC indices

Removing the BRIC index and looking at just Emerging Markets we can see the correlation has existed for 20+ years. 

Remember the Emerging Market Index is upside down! 

S&P500 - Durable Goods - Inflation Expectations

Will the S&P500 Index (blue) follow the US Durable Goods Orders (red) and Inflation Expectations (green) downwards - the last 20 years shows a pretty close correlation between the three! 

Key Events in September & October for the FTSE-100

As readers of our regular weekly updates will know we are keen on history, and stock market history can provide some interesting insights. Sometimes the significance of an event does not register with us until after when with hindsight is remembered as a major inflexion point or change that precipitated market declines. 

Whilst equity markets in 2001 were already in a down trend as the "tech bubble" burst the accounting scandal that broke in October regarding Enron is remembered by many and associated with the declines that led to the market low of 2002. 

In 2008 the Financial Crisis was at its peak with the report that Lehmman Brothers had collapsed and there followed a savage decline in the FTSE-100. 

Now we are not suggesting any form wrong doing but the recent Tesco Accounting Errors could ultimately be remembered in the same way, after all market conditions are similar: - 

• Strong 4-5 year growth in the FTSE 100 as it reaches towards 7000

• Equity euphoria built on an underlying bubble - 2000 Tech Bubble, 2007 Housing Market & Mortgage Backed Securities and 2014 Quantitative Easing

• General perception that equity markets can only go upwards - euphoria 

• Just for good measure each event happened in early Autumn (Sep & Oct) 

Here is a graph below to show you the similarities 

As we always say never rely on one indicator alone but events such as these means investors should at least be on their guard.