Trade concerns hit sentiment but not real data yet

Equity markets continue to slide the slippery slope as September once again looks like being a difficult month for investors. The Nasdaq index fell over 1% on Wednesday, underperforming the broader US indexes, possibly signalling the start of the correction in technology shares. The US equity market has continued to weather the trade war storm however now it looks as if this may be coming to an end.

So far developed equity markets, aside from US ones, have concerned themselves with more the threat of the impact rather than seeing any tangible evidence from Trump's escalation of trade tariffs. Investment managers rightly consider the possibility the economic impact will come eventually.

The release this week the purchasing manager surveys for the previous month indicates the global manufacturing sector dipped again. However not so much that would suggest global economic growth does not remain close to 4%, according to Capital Economics. European equities have been under the cosh as much as any on trade war concerns, the release of the composite Purchasing Manager Survey reported a slight uptick. This would underpin the view that sentiment has been hit harder than the overall economy.

The pound which has been under so much pressure as headlines on Brexit has led to articles suggesting businesses are making contingencies for a “no deal”. Possibly surprisingly the UK service sector PMI reported a rise from the previous month, suggesting economic growth should be maintained in the coming quarter. Employment statistics suggest employers remain keen to hire.

The US economy is probably doing as well as it is likely to as the impact of the fiscal stimulus wears away and interest rates rise further. This will probably continue to impact sentiment towards the emerging markets. We saw this week the South African economy fall into recession. The Chinese economic data recently has also suggested that the economy is slowing.

A stronger dollar and trade war threats have put commodity prices under pressure, which does indicate a weakening demand for raw materials. On the positive side, it does remove some inflationary pressures.

One should also look for the positives, the S&P composite 1500 Rail and Road index which has been a lead indicator for the US equity markets as it can be considered a window on economic activity has shown no signs of rolling over. The Russell 2000 index of smaller companies has been underperforming the main index, that to has reversed in the last few days

Overall trade war concerns are overshadowing sentiment in most areas of the investment world. Helen Shapiro sang it might as well rain until September, as the sun has shone on equity investors into September the investment horizon looks a bit greyer. 

 

 

Posted on September 6, 2018 .