Overall picture points to continued strength ahead in the US

It seems investors are content to continue to bid equities up with key US indices finishing flay yesterday. This is perhaps not surprising given the gains we have seen over the past 10 days. Markets will also no doubt be mindful of attention turning towards the Fed Meeting at the end of the month. Mixed data on the economic and earnings front also provided some cause for something of a stalemate.  However it is also worth pointing out that the DOW remains within almost 100 points of a four and a half year high.

Volumes remain light with the VIX falling again slightly overnight to a new recent low of 14.63. Market sentiment might be described as cautious or watchful but certainly not fearful. Investors are likely pausing for breath after the swings in markets this year. This combined with normal seasonal volumes are most probably behind the muted levels of trading. 

Dow 4 year weekly chart

On balance, economic data overnight in the US came out on the positive side of the ledger. US industrial output rose by 0.6% in July, meeting expectations and suggesting thaht domestic manufacturing is recovering following a weak spring. The numbers were underpinned by a pick-up in motor vehicle output suggesting that Americans are undeterred by the rising price of gasoline. This also goes with the notion that if a house is an American’s castle, the car is a favourite retreat. 

Meanwhile the August Empire State manufacturing index showed a slightly different picture, unexpectedly contracting to minus 5.9 whereas analysts expected a 6.6 gain.  

However notably, CPI was flat for a second consecutive month, compared with forecasts of a 0.2% rise, giving the Fed room for further stimulus. Low inflation is a luxury that many central banks currently enjoy – this may not be the case for much longer however. 

It was also highly significant to see that US homebuilder sentiment rose to its highest level in more than five years to 37 in August. This provides another sign that the hard-hit housing market is turning the corner. 

On balance, fundamentals, technicals and background sentiment (on a contrarian basis) all point to higher prices ahead.