Glass half full ?

A renewed threat of an increase in trade wars over the weekend as China announced further tariffs and weaker Purchasing Manager Surveys led to a difficult start for US equities for the month. The S&P 500 fell almost 3% at one stage on Monday, however, did stage something of a recovery later in the day. The Technology sector was once again under pressure as the S&P 500 entered the 10% correction phase. Tesla shares continue to remain under a cloud, after last week’s downgrade to its credit rating, there is now speculation that they will miss their lowered production target for the Model 3 series. Amazon fell victim to a Donald Trump tweet. The technology sector hit the mark for being over loved and investors overweight and a painful correction was inevitable, all it needed was the excuse.

The Purchasing Manager Surveys released at the start of every month, for the previous month, shows something of a peeking out. The Caixin survey released over the weekend hit a four-month low. This survey focuses more on smaller to medium sized Chinese companies. A reading of 51 against expectations of 51.7 suggests manufacturing is still expanding but remains close to the 50 mark that can suggest contraction.

After last week’s upward revision to q4 GDP for the US economy to 2.9%, the US manufacturing PMI dropped to 59.3. We have pointed out in recent blogs that Purchasing Manager Surveys are at historic peaks and therefore a slowdown was to be expected. On a more positive note, the reading of 59.3 is still healthy and PMI’s tend to peak a few years before the equity market does, historically.

April is traditionally a good month for equity markets and equities have absorbed a lot of unwelcome news recently which will have dashed sentiment. Studying Barron’s summary of collation of sentiment indicators, all have fallen from recent peaks suggesting bullish sentiment has waned a lot in the past few days.

If one were a glass half full merchant, then one could suggest that the sentiment may be close to a turning point and perhaps events might calm in the coming days. It cannot be in either China or the US economic best interests to have a full-blown trade war, and so far, Donald Trump’s bark has been worse than his bite. The tech sector has been under pressure and some blowing of steam needed to happen. Earnings season starts in a couple of weeks’ time and that should show a solid earnings growth. Yesterday’s fall was on low volume as most of the rest of the world was still enjoying the Easter break, that may have played another factor.

Posted on April 3, 2018 .