Markets rally ahead of earnings season

Equity markets have had a good start to the week despite the fall on late on Friday for US equities. The optimism we showed at the start of the week was justified this time. The rallies have tended to be stronger at the start of the day and fade as the day wears on. The implications of trade wars continue to dominate market sentiment, something that is hard to evaluate on a day to day movement. Trump tweets, the market reacts, China than either tries to take the steam out or escalate the issues. Today Chinese authorities are passing out the olive branch.

The increased tensions between Russia and the rest of the world has had a material effect on Russian assets, currency, bonds and equities. It has, however, had no material impact on the broader developed markets. What could be the implications for the global economy if tensions remain between Russia and the rest of the world? Russia exports about 30% of Europe’s gas needs. That could be a risk to Europe. The main risk is possibly a sharp rise in the oil price, which has not occurred as yet. The Brent crude price remains just below its peak earlier in the year. This is possibly one of the reasons why tensions between Russia and the rest of the world have not moved broader equity sentiment. It is also unlikely that we will get a repeat of 1999 Russian crisis when the Rouble was devalued which led to a default on Russian debt.

The other piece of overnight news was the release of the 10-year US Congressional budget forecasts. The focus has been on the forecast that the US budget will get to 1tn dollars in 2020. The debt to GDP ratio could climb to 100%, based on current forecasts. The reason for the increase as tax cuts reduce government revenues, compounded with this the increase the debt ceiling has put greater demand on government spending. Markets did shrug this news off despite concerns that deficits can lead to recessions as it restricts the amount governments can invest in the economy. The other concern will be that the government will need to raise more money in the debt market pushing up interest rates.

Posted on April 11, 2018 .