After 109 days, the S&P 500 fell over 1% on Wednesday, the problems President Trump is having passing the healthcare bill taking the blame. The argument goes, if he fails with this he will struggle with his attempts to amend the taxation rates and implement some of his infrastructure initiatives. One could question why he put healthcare and not the taxation proposals his priority. Poppycock, it was an excuse, equity markets in the US had looked over bought for a while and so a correction after 109 days was more than overdue.
Where there has been an impact is in the US treasury market. Yields on the ten-year US treasury rose to 2.6% before the Fed rate rise announcement, as of the end of Thursday they have fallen back to 2.39%. The recent rise in bond prices may coincide with fears over the implications if Trump fails with his healthcare reform, or it may be in response to the recent fall in the oil price. Over the past few years there has been a real correlation in the price of Brent and US treasury yields. The explanation must be that oil price rising is thought to be a sign of economic growth and hence inflationary pressures. This should push bond yields higher. And as we have seen in the past week, as the oil price has fallen so have yields.
The global economy is currently forecast to grow, according to Citi, at circa 3% in the coming 2 years. That does come with a health warning as analysts have a patchy record forecasting one quarter, let alone 2 years. However, assuming they are vaguely correct that should mean no economic recession in the next two years. This should be good for equity markets, but just as mountain climbers need to pause for breath, so do equity prices.
What could be a catalyst for this pause? Possibly the upcoming 1st quarter earnings season which starts at the beginning of April. On the macro side, it does begin to look like the good news may cause the pause. According to Bloomberg report their economic sentiment index is at a 5-year high.
Later today we get the results of the flash estimates from the Purchasing Managers Surveys for March. We refer to these surveys as they are considered a useful tool for forecasting economic growth in the coming quarters. February’s PMI’s did show some signs of fading. PMI new orders were down 0.5% in February, the biggest month on month fall for a year, according to Deutsche Bank. Looking to the positives, the readings should remain comfortably above 50 suggesting the global economy should continue to fulfil Citi’s, and the broader investor’s expectations.