The expectation of an improvement in the outlook for Chinese manufacturing in March failed to materialise. The flash Markit/HSBC Purchasing Managers Index fell to an eight month low of 48.1, down from February’s final reading of 48.5. For a change, Asian markets took the news pretty well; the Shanghai composite index rose 0.9% on Monday. Should the data continue to disappoint, speculation will increase that Chinese authorities could move to stimulate the economy to ensure it hit its 7.5% GDP growth target for 2014. As we saw on Monday, bad economic news may become good news for equity investors in the region.
In Europe, the Purchasing Managers survey remained robust, but the leadership came from France and not Germany for a change. The flash composite index for France rose to 51.6, up from 47.9. The ongoing upturn in business activity in March rounds off the Eurozone’s best quarter since Q2 2011, according to the survey provider, Markit. Markit does however point out that deflationary pressures remain, with prices charged by manufacturers and service providers both falling in March. Next Monday, the euro area releases its latest inflation data, and on the following Thursday, ECB members meet for the central bank’s monthly rate decision. If the inflation data once again comes in below expectations, despite the improving economic outlook, speculation will once again turn to the possibility of an ECB interest rate cut.
Just to complete the picture, the US March flash manufacturing PMI came in slightly below expectations at 55.5. However, this survey does provide continuing evidence of an expanding US economy.
Equity markets remain in limbo as investor sentiment is impacted by uncertainty in Ukraine and concerns that global leading indicators are rolling over (mainly due to the weakness coming through from China). Despite these uncertainties, investors are putting money to work in global equities, bonds and commodities, which all saw inflows in funds-flow last week, according to Merrill Lynch. However, Emerging market funds saw its 21st straight week of outflows. Money market funds also saw there largest outflows in 4 weeks.
As we enter the last week of the first quarter, things have not panned out as many anticipated at the start of the year. Developed markets as a whole are pretty much unchanged year to date. The worst performances of the developed markets have been in Japan and Hong Kong, down 7.9% and 4.9% respectively. US equities have proven to be one of the more resilient performers, as they did in 2013. The FTSE 100 has also had a poor start to the year; down 2.5%. Emerging Markets are down 5.2% year to date. Bonds have performed better than many expected in the first quarter, despite the Fed tapering as the economic data has remained mixed and inflation has still shown no real signs of picking up.