Have fundamentals gained a spring in their step?
The economy sometimes fluctuates like the weather. Following the chill that hit the global economy during winter in the last few months, will the arrival of spring bring recovery to the market? Let’s check out the insights of industry experts for the outlook on the four major markets.
The following article is provided by PineBridge Investments:
It seems that in recent months, global markets have suffered from seasonal affective disorder, such as continued decline in commodity prices, Chinese equity markets losing another 25% between December and February and the Federal Reserve’s first rate hike in this cycle in mid-December. The MSCI All Country World Index started the year with the biggest decline since 2009.
However markets seem to be cheering up now. Oil prices rebounded in the first two weeks of March. Global equities erased about half the losses from the first two months. Financial markets seem to be pricing in an uptick in global economic conditions.
The Fed moves toward consensus
Economic growth in the US is improving again after a disappointing fourth quarter last year. Not only were rates left unchanged, the Federal Open Market Committee also reduced its policy rate forward guidance from four rate hikes this year to just two. That’s a significant convergence with the prevailing economist consensus and market expectations.
In fact, the adjustment of its policy rate path may well count as a Fed easing move, which would explain rallying stocks and the weaker US dollar. Business surveys have started to improve, manufacturing output has stabilised, and durable goods orders are rebounding. All these suggest that the underlying US growth trend is picking up again.
The European Central Bank battles diminishing returns
Political risk is rising in Europe. The upcoming referendum on the UK’s membership in the EU has created a new source of uncertainty. Meanwhile, the migrant crisis continues to reshape Europe’s political landscape. All these will keep investors on their toes and market volatility high.
The latest purchasing managers indexes suggest the euro-zone economy is picking up speed again. The consumer price index fell to its lowest rate in 12 months, and enough to keep the deflation-obsessed majority in the ECB looking for more policy easing.
Mixed signals in China
The most important part of the global macro story right now is China. China’s multitude of stimulus measures – rate cuts, weakening currency, increased fiscal spending and the easing of restrictions on residential housing – is improving economic activity.
So far, there is little evidence that the government’s economic strategy is working. Both manufacturing surveys slipped below the critical 50 mark in February, signalling an intensifying contraction. Service sector activity has been more mixed this year. Furthermore, two months into the year, the HSBC services index is trending above its fourth quarter average, providing the first tentative evidence that overall economic activity may be turning around.
Japan remains on recession watch
The Bank of Japan left its policy settings unchanged in March. Its foray into negative interest rates in January has not yielded any tangible efforts yet. The service sector activity rebounded strongly in January, but the manufacturing PMI index slipped back below 50 last month. The data point to a small gain in overall GDP growth in the current three-month period, but Japan remains on recession watch after contracting again in the last quarter of 2015.
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PineBridge Investments is a global asset manager with offerings that span the asset class and capital structure spectrum.
- US $84.5 billion in assets under management (as of 31 December 2015)
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