It’s fair to say the most anticipated event last week was Janet Yellen’s speech from the Fed. In the end, European stocks finished higher but not without a flurry of volatility in all asset classes as traders and investors digested Yellen’s remarks.
Her comments were telling of a September rate hike and this is exactly how the market saw it, with Fed Funds Futures on Friday afternoon assigning a 60.3% probability to a 25 basis point rate hike on 14 December, when the US central bank was next scheduled to meet.
‘In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,’ she said in a prepared speech.
The US elections and any potential ‘Trumponomics’ could however influence future decisions, and it can be argued there was a case for fiscal policy and infrastructure investment in order to boost productivity, but those decisions are supposed to be the remit of the US Congress and the President.
The next two biggest market trends that people are talking about at the moment are oil and dividends. Oil is unlikely to rise any time soon and continues its trade at or below $50 a barrel, with the market very much still oversupplied. But some suggest there are renewed hopes the price will stabilise. Inspired by the rebound since March, critics suggest the move has not been driven by better oil fundamentals but rather headlines of a potential output freeze combined with a weakening dollar.
Dividends, on the other hand, have been the victim of a weakening pound reducing the FX impact of overseas earnings. UK dividends (excluding exceptional payouts) fell 3.3% year on year in the second quarter. So what is the impact of this? Some investors warn this implies weaker profit growth in sectors such as oil, mining, banking and retail, threatening the outlook of the UK economy and corporate earnings. Others are subscribing to the positive impact a weak pound will have on exports and the profit-lifting effect. Either way, we’re going to be talking about this for some time to come.