The US Federal Reserve sees a “levelling out” of economic activity and the French and German economies emerge from recession. Ceteris paribus, and given the plethora of upbeat economic data released in recent weeks, one might think that the positive momentum would continue and the market would extend its rally. Not so. The key investment grade CDS indices, the Markit iTraxx Europe and the Markit CDX IG, posted their first weekly “loss” for over a month and their worst weekly performance since June. months and the second-largest rise in points terms since the inception of the survey. In the US, the ISM Manufacturing index came in at 48.9, up from 44.8 in June and well above estimates
Both cyclical and defensive names have lost ground this week, with technology and health care maintaining their position as the tight-end of the scale. Excluding financials, consumer goods is trading the widest.
What has taken the steam out of the rally? Undoubtedly, there has been significant amounts of profit-taking after the steep tightening in previous weeks, and anecdotal evidence indicates that investors are covering their long risk positions. But a couple of key economic reports from the US have weighed on spreads and countered the positive news elsewhere. On Thursday, retail sales for July fell by 0.1%, quashing expectations of a 0.8% increase. A boost to car sales from the government’s “cash for clunkers” programme was more than offset by sharp falls elsewhere.
The negative sentiment was compounded by US consumer sentiment figures released today. The University of Michigan index for August decreased to 63.2 from 66 in July, the second consecutive monthly fall and the lowest reading since March. It seems that the green shoots sprouting in the global economy have yet to be felt by the US consumer.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.