Improving Chinese economic data, as highlighted by the latest Citi economic surprise index, alongside a fledgeling US earnings season that offers encouragement, supporting equity prices. At the start of the week, we highlighted that Johnson and Johnson reported earnings that missed expectations last quarter. This quarter Johnson and Johnson announced results that saw first-quarter profits drop 14% from this time last year, however, this was better than the market had anticipated, and the shares rose. Demonstrating that the market will react better when expectations are lowered ahead of time, and it is fair to say that expectations have been reduced across the board into this earnings season.
Only a few weeks into the second quarter of the year, the S&P 500 is knocking on the door of its all-time high. The FTSE 100 has climbed over 10%, despite economic uncertainties and a stronger pound. The change in sentiment from the start of the year has been notable. In the past week, there was little to rattle investor sentiment. The Vix index, considered one measure of fear and greed among equity investors is trading back close to historic lows, having fallen over 50% from the start of the year. The Russell 2000 index of smaller capitalised stocks up nearly 18% year to date. Equity markets were provided with another leg forward after some positive export data from the Chinese economy on Friday, although import data failed to meet expectations. The next test for equity sentiment will be the first quarter earnings season. JP Morgan offered an encouraging start as earnings and revenue comfortably beat expectations. Commenting on the beat the company but it down to a bright economy and strong lending, encouraging words for equity investors.
The Federal Reserve and the ECB reaffirmed their dovish stance as the IMF lowered growth forecasts for growth in the global economy this year. They now forecast the global economy to grow at 3.3%, down from their prediction of 3.5% in January. As always, the market is ahead of the IMF, and therefore equity prices were little impacted by this change in the forecast. The minutes from the last Fed meeting reaffirmed the view that the Fed is likely to leave interest rates where they are for the coming year. Several of the members believe the current level is close to a neutral run rate, as they also forecast growth to be in line with the long run trend.
Reporting on the ebbs and flows of capital markets, on some days one could fill pages, on others, it feels there is little to report. At this moment in time, there seems to be a pause as investors in all asset classes take stock. The data from the US continues to give something for the bulls and the bears. The jobs report overall shows a healthy jobs market, whilst some of the macro data has been weaker than anticipated. The Citi economic surprise index continues to drift lower. There does appear to be some correlation historically between the first quarter and weak economic data. Equity investors and bond investors currently appear to be taking opposite sides for a potential recovery in the second quarter.
Optimism on trade talks also seems to keep equity markets buoyed as the financial press, for example, the Wall Street Journal, start to use the Goldilocks phrase once again when describing the US economy. The main question is what is going to happen to inflation in the coming months. According to the Bureau for National Statistics, the US economic expansion remains above its potential, which could trigger higher inflation. Other data suggest wage inflation could rise further. The oil price continues to rise - again possibly raising inflation rates. Signs that inflation is picking up will put the Federal Reserve (Fed) in a difficult position.
The data from Europe does at least seem to be improving, if only modestly. German manufacturing orders remain weak, however, there has been something of a recent bounce in German industrial production. The eurozone services Purchasing Managers' Index (PMI) has been rising in the past couple of months. The Services PMI is a reflection on employment, there can be a lag between services and manufacturing, so it is possible that manufacturing PMI data improves in the coming months. Recent retail sales data beat expectations as did the latest economic sentiment indicator. Mr Draghi may be able to point to some green shoots of a stabilisation of the euro area economy at the monthly meeting.
Equity markets have once again paused for breath ahead of the European Central Bank meeting and the release of the minutes from the last Fed meeting. The start of earnings season may be the catalyst for the next directional move.
After seven straight up days for US equities, sentiment, at least according to the CNN fear and greed index has moved deep into greed. Likewise, the recent rise in bond prices has led to bond sentiment rising into bullish levels. If these indexes are considered any guide, a potential sell-off in both asset classes could be on the horizon. Several important announcements in the coming week could impact sentiment towards both asset classes.