The failing of the Doha talks, and the subsequent sell off overnight on Sunday of Asian equities seemed to offer all the bears some respite, but as some of those bears possibly looked to dip their toes there appeared to be few sellers as prices recovered. According to the latest fund flow data, over 50 billion dollars has come out of equity funds this year, and in contrast 40 billion dollars has gone into bonds. Equities has seen 8 straight weeks of outflows, cash levels remain high. The love hate affair with equities appears to be continuing. According to Merrill Lynch the rolling return on commodities is at a multi decade low. Yet despite this many fund managers remain, if recent surveys are correct, underweight.
One determinant of equity performance will be the Q1 2016 earnings season which now fully swings into action. On Monday several “blue chip” companies reported their earnings for the first quarter. Despite profits halving from a year ago, Morgan Stanley, in common with most of the bank sector this quarter, managed to clear a low bar. PepsiCo and IBM also managed to beat expectations, despite this the “Big Blue” traded lower. On Tuesday we saw earnings reports from Johnson and Johnson, Intel and Philip Morris. Johnson and Jonson managed a small beat, rather as Reckitt Benckiser did on Monday. Philip Morris missed estimates, the currency moves taking some of the blame, and Intel fell 3%. Goldman Sach’s followed Morgan Stanley beating expectations. Continuing the roundup of earnings reports, Rio announced its latest production report, despite modest cuts to future production forecasts from the company, which led to some analysts to adjust earnings accordingly, they did meet this quarters production targets. Hopes that the second half of the year will improve the outlook for commodity prices, meant the stock rose on the report.
The bearish report last week from the IMF has not dented equity prices in the past days. This may well be as the IMF appeared to be encouraging governments to not rely entirely on low interest rates to stimulate the global economy. The IMF committee said a more “forceful and balanced policy mix” was needed to stimulate growth and avoid deflation and emphasised that monetary policy alone was not enough.” Growth friendly fiscal policies is needed, and accommodative monetary policies should continue in several advanced economies. Those last comments may well be directed at Janet Yellen and the rest of the Federal Open Market Committee.
The risks into the second quarter remain balanced, we have argued on several occasions that a “goldilocks environment” is almost the best one for equities. At present you have slightly weaker consumer data and possibly slightly better manufacturing data. Will the day to worry for equity investors be the day the World Bank and the IMF start getting bullish on the global economy?