Earnings momentum remains stable for now.
Economic surprise driving EUR v USD but no FX hit to eurozone profits estimates
It may be the perfect environment for passive strategies as the lack of catalysts during 2017 has led to a continuation of the low volatility yet highly-valued equity market regime. In particular, it has been a robust year for corporate profitability. 2017 earnings growth forecasts remain pinned around 10%. Even while the medium-term outlook for markets looks challenging on valuation grounds as extraordinary monetary stimulus is unwound, those looking for a significant correction in the short-term should beware as corporate earnings trends remain robust at present.
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Fed policy: Don’t forget your flip-flops.
US inflation and growth numbers undershoot expectations
It is just a few weeks since the US Fed raised interest rates and central bankers globally opined on a removal of monetary accommodation (albeit slowly) as the global recovery gathered momentum. Unfortunately, some inconvenient facts are already casting their shadow. The Atlanta Fed US GDP nowcast for Q2 17 has fallen to 2.4% from 4% at the start of June, with disappointing US retail sales contributing to the downgrade. Furthermore, core CPI has undershot expectations with the year-on-year figure now at 1.7% for June, compared to 2.3% at the start of the year. Fortunately for central banks, the holiday season has started and the focus may be elsewhere. However, some re-calibration of the trajectory of US monetary policy may already be necessary.
Read more...Just what the Fed wanted.
A rate increase and a rising market – but was it really dovish?
Having primed markets to fully expect a US rate increase, the FOMC followed through on the 15th March. If the aim was to deliver a rate increase without abruptly causing tighter financial conditions (code for declining equity and credit markets), then it was mission accomplished. Following the FOMC announcement the dollar eased against other currencies, bond yields fell and equity markets gained. However, despite comforting language within the statement we detected a more strategic, rather than data dependent, direction for US interest rates in the press conference Q&A.
Read more...Forward guidance - Trump style.
These are strange times in global markets. Trump’s election, previously feared as a universal negative for global markets, has been accompanied by remarkable strength in risk assets. We highlighted investor positioning as a factor last week but now question if there is there more to this rally? Could Trump’s fiscal policies represent a “whatever it takes” moment?
Read more...Earnings forecasts: Reassuringly stable?.
Recent trends in consensus earnings forecasts highlight analysts’ confidence in corporate performance for 2016, even as GDP forecasts continue to decline. For now, it appears that the global phenomenon of steadily declining earnings forecasts, a factor behind the relatively weak 2015 equity market performance, has ebbed. There also remains no observable impact on aggregate UK earnings forecasts from Brexit to date, although as we have previously noted for the UK, FX benefits for exporters have offset modest downgrades to sectors focused on the domestic economy.
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*Multiple Sectors
In this month’s strategy piece, Alastair believes that the impact of the easing of monetary policy during 2019 is still only likely to start to feed into the real economy by early 2020. The prospect of an improvement in economic conditions is now driving a substantial positive shift in investor expectations, leading to a reduction in risk premia and higher asset prices across asset classes. The US/China trade conflict appears to be moving towards a Phase 1 trade deal and at the time of writing the UK’s Conservative Party is sufficiently ahead in polling that in 2020 both a resolution to Brexit and a re-centring of British politics are now reasonable prospects, in our view. Nevertheless, based on the rally in global markets during the autumn, we believe a significant proportion of this political good news is in the price. Long term, the cohort of the largest global equities appears priced to offer returns in excess of currently very low yields on government bonds. We remain neutral on the outlook for equities, with the near-term risks of a relapse in confidence given the recent rally balanced against the more positive longer-term view. Finally, government bond yields appear at risk of further increases should the incoming economic data continue to improve.