Global Markets to 29 April 2019
- Wall Street hits a record peak before retreating on economic slowdown fears, despite the latest headline US GDP figure
- US corporate earnings are mixed, but Microsoft joins the US$1 trillion market cap club
- The UK Chancellor visits Beijing in the hope of winning more business and drumming up trade with China
- Late-cycle concerns see an increase in demand for US two-year Treasuries, sending yields lower
- The week ahead is likely to see further corporate earnings reports and the Federal Reserve Bank’s news conference, following its two-day FOMC meeting
- Global equity markets will continue to be momentum-driven over the coming weeks as the corporate earnings season continues
Global Market Summary
As the global economy enters its tenth year of expansion after the global financial crisis, – almost the longest period since records began –periods of concern, corrections and higher levels of volatility among financial assets are all normal.
One such period was December 2018. But there has been a recovery across global equity markets in the four months since then. This is most definitely a late-cycle characteristic: a significant period of economic outperformance is followed by soft patches that are catalysed by unpredictable global events.
Recently, investors have been on something of a rollercoaster ride created by uncertainty regarding the outcome of the US-China trade talks, Brexit and the future direction of interest rates. A possible peak in the corporate earnings cycle and disruptive technologies have also been a source of nervousness among investors. But overall, the backdrop for risk assets remains supportive and even attractive in some regions and sectors.
Last week’s headline US GDP figure was impressive: the economy grew by 3.2% (annualised) in the last quarter, while economists had only predicted growth of 2.2%. This better-than-expected growth can mainly be attributed to personal consumption expenditures (PCE), private inventory investment, net exports, state and local government spending and non-residential fixed investment.
However, a breakdown of the numbers reveals a build-up in inventories of unsold goods and weaker consumer spending. Businesses clearly want to hold as little inventory as possible, otherwise, excess supply over demand can become a problem. On the other hand, if foreigners continue to buy US exports at the same time as Americans continue to reduce their reliance on imports (favouring domestic spending), the recent slowdown fears might not be justified.
As far as the first-quarter US corporate earnings season is concerned, results have been mixed across the various sectors. The technology sector always generates the most interest and last week was no exception. Amazon soared past Wall Street forecasts with revenue in line with estimates; Microsoft joined the US$1 trillion market cap club following some excellent corporate earnings numbers.
This means that the current total market cap value of Microsoft, Apple, Amazon and Alphabet stands at some US$4 trillion. To put that into perspective, that equates to the combined value of 250 of the smaller stocks listed in the S&P 500. Next week, company analysts will focus their attention on earnings reports from Alphabet and Apple, with expectations riding high.
As far as international affairs are concerned, UK Chancellor Philip Hammond visited Beijing and hailed China’s Belt and Road initiative as a “truly epic ambition”. In his speech, Mr Hammond expressed his hope that UK companies might in the future benefit from it.
The Chinese Belt and Road Initiative (BRI) is an ambitious programme to connect Asia with Africa and Europe by means of land and maritime networks along six corridors in order to improve regional integration, increase trade and stimulate economic growth.
But the UK is one of the country’s (together with a number of EU members including France and Germany) which refused to sign a bilateral memorandum of understanding with China on the initiative citing environmental concerns, debt burdens on Third-World countries and a lack of transparency in contracts with Western countries.
Interestingly, however, the Chancellor’s comments come days after ministers opened up Britain’s 5G data network to Huawei, the Chinese telecoms group. This in itself has created concerns and a measure of animosity between Britain and the United States, with one of US’s most senior intelligence officials spelling out Washington’s position on the subject, highlighting its anxieties over security.
The United States has been petitioning its allies for quite some time now, telling them that using the Chinese telecoms company would endanger the security for the next generation of mobile Internet communications and give Beijing the ability to interfere with mobile networks.
Any increased tensions between the two superpowers over important issues such as future technologies and communication advances could risk the outcome of the current trade talks. This would be bad for the markets, especially for those of emerging countries. Similarly, the recent rise in crude oil prices or any further increases in the value of the US dollar could also trigger a significant event in the markets.
The UK will host an Economic and Financial Dialogue in June with China, designed to showcase the City of London’s powerful financial services industry. In the same month, President Trump is due to make a state visit to the UK. However, Labour leader Jeremy Corbyn, Commons Speaker John Bercow and Liberal Democrat Leader Sir Vince Cable have already declined to attend the Buckingham Palace banquet. During their visit, the President and First Lady will be guests of the Queen and are due to attend a ceremony in Portsmouth to mark the 75th anniversary of the D-Day landings.
Stock market anxiety is always waiting in the wings, particularly when the V-shaped recovery has been so pronounced since the end of December 2018. Any proof over the coming months that the recent weakness in the global economy has subsided will, therefore, be beneficial.
Continued solid corporate earnings growth and sensible monetary policy from the US Federal Reserve Bank will also help to calm any nerves about this ageing bull market. But it’s worth remembering that bull markets don’t die of old age: they die of unforeseen events.
In the weeks ahead, the markets will continue to be influenced by factors that have been in the forefront of market momentum over the past few months: US-China trade talks, corporate earnings, the Federal Reserve Bank and the outcome of continuing Brexit negotiations.
Late-cycle concerns will undoubtedly continue, and we have already seen US Treasury bond yields move lower as cautious investors add to bonds positions as a vigilant strategy against the possibility of higher levels of volatility, or a pull-back in equity markets. But for longer-term investors, quality global equities remain the asset class of choice.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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