Leading equity indexes marked time in the past week, as recent economic data continues to indicate a slowing global economy. Following weaker Chinese GDP data, the latest Purchasing Manager surveys for the Eurozone reinforced the view of a slowdown. Both the manufacturing and the services indices were below consensus forecasts and are now approaching 50. The level below which is considered to mark economic contraction. China has recently announced a series of measures to stimulate their domestic economy. On Thursday Mario Draghi accepted the fact that Eurozone’s economy is stalling. The market now places a small probability on the ECB raising rates before September this year. Late on Friday Donald Trump announced the end of the government shutdown despite not getting the funding secure for his Mexican wall.
Despite the weaker outlook for the global economy, equity markets in the US have risen just over 6% from the start of the year. Encouragingly, consumer discretionary shares have been outperforming staples. Likewise, the Russell 2000 index, considered more exposed to the US domestic economy, has risen almost 10% so far this year. The FTSE 100 continues to struggle, not boosted by the weakness in sterling towards the end of last year and now seems held back by the recent strength. The pound reached 1.32 to the US dollar on Friday as optimism improves towards a Brexit as the DUP have indicated they could support Theresa May’s deal.
Almost a quarter of the companies in the S&P 500 have reported earnings for the fourth quarter, with another busy week ahead as 25% of the S&P 500 report and 13 from the Dow 30. According to Factset, 71% of companies are reporting earnings above estimates. This is in line with the five-year average. The year on year growth rate is 10.9%, a modest improvement from the previous week of 10.6%. Apple is one of the many companies of note.
Other events for the week ahead that will grab the headlines is the first meeting of the year of the Federal Reserve. There has been some speculation in the Wall Street Journal that the Federal Reserve could curtail their balance sheet reduction as this has been considered a further tightening measure on top of the rate hikes. Should the Federal Reserve make this move after the ECB last week and the Chinese central bank a week ago this will be another sign central banks want to ensure the global economy does not slow any further. We also get the latest US jobs report, ISM manufacturing Purchasing Manager Surveys.
Parliament vote on “Plan B” for Brexit this week. Other notable announcements will be the UK Manufacturing PMI, Eurozone Q4 GDP growth and China Purchasing Manager Surveys. This will give economists further indications of the outlook for the Chinese economy.