Markets

Major indices ended the week in the green supported by a strong year on year US GDP growth of 3.1%. On the monetary side, the release of minutes of meetings of the FOMC indicated the intention of the committee to end balance sheet reduction later during the year. This is a dovish turn from their stance of last year and is positive for the S&P500 which has a positive correlation to the balance sheet of the FED.

In another tailwind for risk assets, there have been numerous reports from the Trump administration that a trade deal with China is imminent. The key gain would be the rolling back of tariffs to pre-crisis levels amid conciliatory measures by both parties. However, the release of Manufacturing PMIs’ shows no indication of an end to the slowdown in the Eurozone with Germany, Italy and Spain posting numbers below 50 which is considered a contracting economy. While the year on year growth rate for the area remains above 1%, it is hard to see how the ECB could maintain a hawkish stance this year and this will also be a positive for risk during the year. We are moving to a scenario where ‘bad news is good news’ as it will force fiscal and monetary easing.

An illustration of this is the move by Chinese authorities this week to allow their budget deficit to increase to 3% of GDP and this enables them to reduce VAT by 3% on certain brackets to fight back against a forecast fall in GDP growth this year. The neutral to dovish stance by central bankers in the face of deteriorating economic data based on manufacturing PMIs’ (chart above) sets the stage for short term range bound action by equity indices. These macroeconomic and financial conditions discussed in our columns represent an opportunity to position portfolios for longer term benefits which will arise as the effects of easing translates into improved corporate earnings.   

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