Headwinds increasing

The first three weeks of April were notable as a sense of goldilocks returned to markets, enabling key global equity markets to build on their 2019 gains. The feel-good factor underpinned by the dovish pivot by key central banks and a run of stronger than expected economic data in April, which included:

• Better than expected China data, including Caixin manufacturing PMI, total social financing, industrial production and retail sales.
• A rebound in key U.S. economic data, including the ISM manufacturing data, retail sales and non-farm payrolls.
• The German ZEW forward-looking expectations sub-index returned to positive territory for the first time since March 2018.

A more sombre mood has progressively taken hold this week. Firstly, as news emerged over the weekend that the China Politburo would focus on “structural reforms” instead of stimulus to move the economy forward.

On Wednesday, in Australia, Q1 CPI was even softer than expected, the 13th consecutive quarter that year on year core inflation has been below the floor of the RBA’s 2-3% target range. Then followed, the German IFO survey which gauges the mood of approximately 9000 participants in Europe’s largest economy which unexpectedly fell to 99.2. Before the Bank of Canada, joined the list of central banks to remove their tightening bias.

Finally, yesterday in South Korea, Q1 GDP defied expectations of a 0.3% rise to contract by 0.3%, the weakest since the global financial crisis. The South Korean economy, because it is heavily dependent on global trade, is viewed as a good indicator as to the health of the global economy.

Historically, when the Fed pauses a tightening cycle or starts an easing cycle, equities can return up to 20%. With the S&P 500 currently +17% year to date, and as we approach the seasonally weak "sell in May and go away" period, the risk reward of further gains at current levels is becoming stretched. Consideration of a more cautious approach which includes trailing the stop loss higher on long positions (below interim support at 2860/50) now appears warranted.

Source Tradingview. The figures stated are as of the 26th of April 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.