The FTSE 100 has fallen 5% from its recent highs, the Dax index of leading German companies a similar amount, as has the broader eurofirst 300 index. Once again the S&P 500 has outperformed other developed markets, so far falling only 2%. The FTSE 100 is once again below where it started the year, in absolute terms. Sentiment to equities remains cautious, the latest AAII retail investor sentiment survey recorded just over 20% of those polled thought the market will be higher in 6 moths time. Lipper fund services reported another week of outflows from equity funds. Global growth concerns once again appear to be weighing on investors after the recovery in equity prices from mid-February.
The past 24 hours has seen a raft of economic data, encouragingly the US Purchasing Managers (PMI) final readings for April were on the whole better than expected. The Index for Supply Management services PMI came in at 55.7, the highest reading so far this year. The Institutes index reading for non-manufacturing new orders was ahead of last month’s. US factory orders month on month rose 1.1%, ahead of expectations. Later on Friday we get the latest employment data, including average hourly earnings, the latest unemployment rate for April and average weekly hours. Speculation is once again starting to increase that the Federal Reserve will look to raise rates again in June. Despite this, US treasury yields have been little moved by this week’s data. Two year yields, the most sensitive to changes in rate sentiment remain at 75bp, pretty much where they were a month ago.
The picture was not quite so rosy from the UK on Thursday. Earlier in the week the Markit manufacturing PMI came in below 50, this is supposed to suggest a shrinking manufacturing base. On Wednesday the construction component came in below expectations, and on Thursday we got the Markit non-manufacturing PMI for April. The Financial Times reported that these combined readings suggested the UK economy is slowing in the second quarter. Markit’s Chief Economist described the UK economy as stalling, signalling economic growth of 0.1% in the second quarter. As one would expect a large part of this weakness is being associated with the Brexit fears.
The ECB released their monthly economic bulletin on Thursday, which seemed to give the same message that has been delivered over the past year. They continue to guard against inflation staying too low, although at present not too bothered about the recent strength in the euro. Reiterate it is essential to preserve an appropriate level of accommodation to under pin the economic recovery. The ECB did believe the additional monetary stimulus is having positive effects on the economy.
Earnings season is half way through and according to JP Morgan, 76% of companies in the S&P 500 that have reported beat EPS expectations. Year on year earnings decline is minus 8%. This is in line with analysts’ forecasts. It does however mean that US equities have rerated expecting an uptick later in the year in earnings. In Europe the Stoxx 600 there has been a 20% decline year on year in q1 earnings. There has been less of a rerating in European stocks as the index has fallen about 15% in the past year to reflect this earnings weakness.