Stock markets in Europe bounced early on Tuesday after China released its economic growth for the fourth quarter last year and 2015 overall. The numbers were in line with expectations, and probably better than many feared might be the case. Tuesday’s rally will probably be, what is termed, a relief rally, as the focus will return to earnings and the US economy in the coming days. To support this view equity markets in the US started the day higher but once again failed to follow through as the day wore on. The reality remains China is important to the global economy, but America is the driver of the global economy, in our view.
Uncertainty has grown over whether the US economy is close to being in recession, the behaviour of the credit markets in Europe has likewise led to questions about the strength of the euro zone economy. The spread between high yield corporate debt and government debt has grown to its widest in three years, according to Barclays credit indexes. Does this indicate the Eurozone economy is heading for a recession? Or is this move part of a general de-risking of assets?
At present, aside from the bond market, in our view there would be little to suggest the Eurozone economy is heading for a recession. On Tuesday two surveys from ZEW Centre for Economic research reported that the German economy, current conditions and economic sentiment, both beat expectations. Euro area construction output for the euro area also beat expectations, whilst inflation for December came in line with analyst forecasts. On Thursday we have the latest rate announcement from the European Central Bank along with the following press conference, we are sure Mario Draghi will face questions on his current view of the state of the European and global economy, and whether he sees signs of a recession looming.
Concerns remain however on the strength of the global economy as the IMF released their latest forecasts, and cut estimates from their last October forecast. They now expect the global economy to grow at 3.4% this year and 3.6% next. Interestingly IMF economic councillor was quoted suggesting that he believes economic markets are over reacting to the fall in oil prices and the concerns over the Chinese economy.
Results season we said is once again key, on Tuesday night another possible demonstration of how the world is changing for investors. IBM reported numbers that were in line with expectations and the shares fell modestly in afterhours trading. Netflix, on the other hand, came in with profits above expectations and the shares rose by 9% in afterhours trading. In the banking sector Morgan Stanley and Bank of America both beat expectations. Goldman Sachs report later on Wednesday.
Mark Carney, in a speech on Tuesday, seemed to dampen any speculation that the Bank of England will follow the Federal Reserve in the coming months and look to raise rates.