Global equity markets did rebound at the start of the week as always are led by the US. Equity markets, particularly in Europe, did look very oversold at the end of last week so something of a recovery was possible. Our optimism that the performance of the Vix at the end of last week bode well for the start of this week seemed justified. The S&P 500 had its biggest one-day gain in two and a half years on Monday. Those who follow technical market performance seem mildly encouraged by the reaction of the US equity market. One cannot feel though that this period of consolidation may yet be over.
There was little economic news to provide the catalyst for the rally however the rhetoric between the US and China has been toned down, giving hopes that a trade war between the two will not develop. China has offered easy access to the Chinese marketplace. Steve Mnuchin the US treasury secretary has talked about negotiations with China to reach an agreement.
We are within a few days of Easter and the end of the first quarter of the year. One that started with great optimism for another solid year of equity performance is looking like ending with a great deal more caution. The tax boost, stronger economic growth, strong company earnings and central banks that were tightening monetary policy, but at a measured rate all contributed to the optimism.
Not a lot of those events have materially changed, global economic growth is still forecast to be around 3.8%. Company earnings in the first quarter met expectations and, in many cases, beat. The Federal Reserve, as expected raised interest rates in March and are more than likely to do so again twice more this year. The ECB will reduce its stimulus later this year, however rate rises are still a way away. Inflation has remained subdued, indeed in Europe remains well below target and the latest UK inflation report saw a larger than expected drop in the year on year rate. The threat of trade wars in the past few weeks has dented equity sentiment.
Looking to the next quarter, May is the month we should sell and go away. April is traditionally a better month for equity markets. Equity prices do feel more vulnerable than they did and investors more sensitive to news. However, they don’t necessarily need to fall further, they could just stagnate and do nothing.
Have a happy Easter