The Markets

After a week that left investors wondering what’s next – much like fishermen on a lake as the wind kicks up and the water gets choppy – the wind settled and the fish started biting. U.S. stock markets posted their best weekly returns in almost two years last week. When all was said and done, investors were $900 billion richer on paper, according to experts cited by Barron’s.

One of the most interesting things about the week was that little changed. The Eurozone’s precarious economic state did not stabilise. The Middle East remained in an uproar. The Russia-Ukraine conflict persisted, complete with sanctions. Ebola continued to be a threat, although vaccines are in the works. The FTSE 100 was up 0.5%. Some traders expect the FTSE to continue to climb for the rest of 2014 – good news! However, the pace of growth in China did not accelerate. In fact, a working paper published by the National Bureau of Economic Research suggested: 

“There are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth.” 

Some things related to China changed last week, though. It launched a new infrastructure bank along with 20 other countries, including India. The bank is intended to complement or rival the World Bank, depending on whose rhetoric you believe. 

So, why did markets bounce? Barron’s said it had a lot to do with the Federal Reserve. As monetary policy has become less easy and volatility has picked up, “turbulence was in the direction of deflation, with commodities – especially crude oil – sliding and government bond yields plunging further around the globe.” Enter St. Louis Fed President James Bullard who suggested quantitative easing could be extended, if economic data supported it. 

In other words, weak inflation numbers could shape Fed policy and delay interest rate increases. That was the story the numbers on the Chicago Mercantile Exchange told, anyway. The probability of the Fed raising rates by September 2015 declined sharply last week, moving from 81 percent to 42 percent. The market’s strong positive response has been dubbed the ‘Bullard Bounce.’

 
 
 

Lexington Wealth Management