There is nowt queerer than markets, or something like that. Equity markets around the globe started Wednesday morning fearing the worst as China announced a new set of tit for tat tariffs on soya beans, aircraft and orange juice amongst other commodities. It is easy to say this with hindsight but at that moment it did begin to feel this could prove to be the low point in tariff sentiment. This tit for tat could not go on forever, eventually, common sense would take over. It did in the form of White House spokesman Larry Kudlow stating on Fox News that this was part of a negotiation ploy. The US equity market staged a 700 point turn around. This all goes to prove it remains darkest before dawn.
We tried to start the month on a slightly more optimistic note, as the FTSE 100 had just had 3 consecutive months of negative returns, as we talked about trying to look at the glass half full. That optimism seemed misplaced early yesterday morning, however, we will try and hold our nerve. 700 points swings do nothing for risk manager tolerance levels, and traders will be encouraged to keep inventories down, this could mean volatility remains part of everyday life. It also means they won’t have inventory to sell and could get squeezed higher.
Part of the trouble today is everything looks so good in a way, one worries that the only way can be for the news to get worse. The latest purchasing manager surveys are a good example of this. Many country readings are close to historic peaks and this week most have come in below expectations. Despite this the readings remain close to historic peaks but the trend may well continue to be downwards. PMI’s are not the only indicators to have peaked. This does not necessarily mean the end of the bull run in equities, PMI’s peaked well before the market did in 2007.
Recently the yield curve has flattened as long rates have fallen faster than short rates, this has added to concerns of a slowdown. What we may give equity investors confidence is to see the long end of the curve move out again. The likelihood of three further US rate rises this year appears to have diminished, this could mean that 2-year rates can remain stable where they are around 2.25%. If there is regaining the confidence of economic growth around the globe and trade tariff fears settle down, then the long end could start once again to rise. This historically is good for equity prices. First quarter earnings season will soon be upon us, that will be another determinant.