Most markets were up overall for the fortnight – weekly update 9 April

A look back over macroeconomic and market events for the fortnight ending 7 April 2018. Several major equity markets dipped back into correction territory as various factors converged to spook investors, though most markets were up overall for the fortnight. Fundamentals are still strong, and the latest US earnings season, starting this week, will be closely watched.

Major equity markets dipped back into technical corrections

Major developed equity markets dipped back into technical corrections (that is, down more than 10% from the recent highs) over the last two weeks as a number of separate concerns converged to unnerve equity investors.

Lingering concerns over inflation persisted after events in February, while trade tensions between the US and China accelerated sharply and threatened to manifest into a full-blown trade war. On top of this, a tech backlash hit several of the recent equity market leaders with Facebook, Amazon and Tesla all having unrelated but coincidental adverse events.

While it is all but impossible to know how these factors will play out, the risks to us look fairly symmetrical. We acknowledge these growing concerns, but they don’t alter our investment outlook which remains focused on the fundamentals, with US earnings season starting this week being of much greater interest.

US non-farm payrolls short of expectations

US non-farm payrolls fell short of expectations but had a minimal impact, adding 103,000 jobs in March versus expectations for 185,000. But they came with an upward revision of 13,000 to February’s bumper reading.

More importantly, average hourly earnings rose as expected by 0.1% to 2.7% year on year (yoy). Unemployment remained at 4.1% (4.0% was expected) and underemployment fell by 0.2% to 8.0%.

Broad economic data suggested steady growth

Broad economic data continued to suggest steady growth with few surprises. The UK composite PMI for March slipped from 54.5 to 52.5 (54.0 expected), dragged down by the services component but comes amid weather-related disruption in March. The Eurozone composite PMI slipped 0.1% to 55.2 (55.3 expected).

In the US, the Institute for Supply Management Manufacturing PMI cooled from 60.8 to 59.3 (59.6 was expected) and Non-Manufacturing PMI slipped from 59.5 to 58.8 (59.0 expected). Eurozone CPI inflation rose as expected from 1.2% to 1.4% yoy, and US PCE inflation rose from 1.7% to 1.8% yoy (no change was expected).

Last week’s other events

• In the UK, Consumer Confidence, as measured by GfK, improved from -10 to -7 (no change was expected). The Lloyds Business Barometer fell from 33 to 32 and consumers added another £1.6 billion net credit in February (from £1.4 billion and expectations for the same)
• US personal income was up 0.4% month on month in February (no change as expected) and spending remained at 0.2% as expected
• Japanese CPI inflation fell to 1.0% yoy in March (from 1.4%, 1.3% expected) as industrial production slipped from 2.5% to 1.4% yoy (2.3% expected). Composite PMI was 51.3 from 52.2
• Chinese Composite PMI rose from 52.9 to 54.0 on the official reading, whist the private Caixin Composite PMI measure registered a fall from 53.3 to 51.8
• Eurozone economic confidence slipped from 114.1 to 112.6 (113.3 expected)

The markets

Equities were especially volatile over the two weeks, but were actually mostly in positive territory over the whole period, with core bond yields also firming up.

Equities

Volatility has certainly been back in equity markets. Several markets re-entered technical correction territory before broadly rebounding, leaving most markets in positive territory for the two weeks. Japanese equities (as measured by the TOPIX) returned 4.2% over the period, with the UK up 3.5% and Europe (excluding the UK) rising 2.5% (both using MSCI measures). In the US, the S&P 500 returned 0.7% for the fortnight. The MSCI Emerging Markets index fell -0.7%.

Bonds

UK 10-year government bond yields were down 5 basis points (bps) to 1.4%, with the equivalent US Treasury yields also down 5 bps to 2.77%. German 10-year bunds were 3 bps lower, down to 0.5% by the end of the fortnight.

Commodities

Oil was off its recent highs, but still towards the upper end of its trading range, with Brent crude oil last seen at US$67.11 per barrel on Friday. Gold was also marginally weaker, ending at US$1,333 per ounce while copper strengthened to US$3.06 per lb.

Currencies

The US dollar gained a little strength over the fortnight, along with sterling also exhibiting some strength. Sterling finished at US$1.41, €1.15 and ¥151 on Friday.

The week ahead

There are a few points of note for the week ahead. US inflation on Wednesday will be a highlight, with markets expecting CPI to increase from 2.2% to 2.4% yoy, and we will get the minutes from the latest Federal Open Market Committee (FOMC) meeting on Wednesday evening. Ahead of those releases, Wednesday will also give us UK industrial production numbers (2.9% yoy expected from 1.6%), with Eurozone industrial production out on Thursday (3.5% yoy expected from 2.7%). At the end of the week, Chinese trade data will be released. The daily breakdown is as follows:

Monday: Overnight from Japan we will have the latest Economy Watchers Survey results and Consumer Confidence. Later in the morning, Germany reports trade data, and in the UK, Halifax will release house prices data.

Tuesday: A minute after midnight, UK like-for-like sales from the British Retail Consortium are out, followed by Japanese Machine Tool Orders. In the afternoon, US PPI inflation data are out.

Wednesday: It’s a busy day midweek. In addition to UK industrial production, US CPI inflation and the FOMC minutes covered above, there will also be Japanese Core Machine Orders, Japanese Bank Lending and Chinese CPI for March to look forward to.

Thursday: As well as Eurozone industrial production (covered above), US import and export price data are released, but it is a fairly quiet day otherwise.

Friday: Finishing the week off, we have the Eurozone trade balance and the latest University of Michigan sentiment surveys due out, as well as Chinese trade data, covered above.