Weak momentum and other old themes for a new month
Spot anything familiar?
A familiar global stock market pattern looks set for another week, at least. A low quantum of momentum drives indices higher early on, but gains are not sustained, and markets close well off their best. Tell-tale signs of the torrid first quarter remain evident. Tuesday’s early positive blush in U.S. stock index futures barely made it through Europe’s morning. Major markets on this side of the Atlantic were also mixed. The dollar’s tortuous resurgence is still a big driver. It eked out new four-month peaks overnight, keeping the whole complex—including Treasury yields and higher inflation expectations—in the spotlight. It’s notable that whilst Germany’s DAX, Britain’s FTSE and Japan’s Nikkei notched 2018 lows towards March end, they have since risen between 7%-9%, outperforming a barely flat S&P 500. Apart from Japan though, higher-yielding Asian markets are seeing no clear benefit from these conditions, unlike last year. The dollar’s ambiguous comeback and elevated trade tensions have kept MSCI’s Asia Pacific index (excluding Japan) flat since March as well.
Watch ISM PMIs after CIPS PMI let-down
So, it continues: MSCI APAC was weak in Tuesday’s Asian session – though there were fewer participating markets due to holidays. Washington delayed imposition of steel tariffs on allies, but that provided only a temporary lift for shares. The wider tariff picture is still murky. In this context, we need only substitute Monday’s release of the Core PCE Index inflation with manufacturing data due on Tuesday. We can guess how markets may react if ISM’s PMI indices also suggest reflation. The PCE barometer flashed 2% on-year growth, near the central bank’s target. That was the most obvious trigger of Monday’s indices reversal. On Tuesday, consensus sees ISM’s main manufacturing index slipping to 58.3 from 59.3. Woe betide dollar bears if that doesn’t happen. The UK’s version of a manufacturing leading indicator, compiled by Markit/CIPS missed a forecast rise by 1.3 points to 54.8. Instead, it fell nine tenths of a point to 53.9. This will not calm concerns that a previously flagged Bank rate rise this month could be skipped after BoE governor Mark Carney recently threw a spanner in the rate expectations works. Either way, it’s always worth remembering to discount the sway that unofficial and non-empirical data have on policy. The impact on sterling has been predictable, but with the rate against the dollar down 4.83% since peaking at $1.4376 this month though, bearish reactions are decreasing in severity. Cable was last 45 points lower post-data.
Strong earnings are not enough
Markets have also been looking through some of the best corporate earnings growth for decades in their current mild funk. Investors seem to reckon earnings could have peaked anyway, so there’s less incentive to buy more stocks. Less than perfect corporate stories are tolerated even less right now. For instance, BP’s quarterly profit surged 71% to $2.6bn, though its cash flow outlook tilted lower as capital demands increased, whilst net debt inched up. BP’s net debt now stands at an even higher proportion of total capital than Shell. That’s one less reason for the market to redress the debt and equity rating imbalance between the two. BP stock was up 1% at last look. That rise looked vulnerable to any weakening of FTSE sentiment that lifted the benchmark’s 0.2% at the time of writing.
Apple eyed amid data dearth
The day’s other quarterly reporting highlight, this evening from Apple, could bring similar dynamics, though there are signs shareholders are tiring of its story of sliding iPhone demand and slowing revenue growth. Hardly surprising really, after the company with a $285bn cash pile said in February it wanted to reduce that to “approximately zero”. With service revenue thought likely to take over as Apple’s key top-line driver until recently, the stock may still take hits if sales of music, app store and similar services disappoint again, per Q1. Still, if pay-outs rise above an already humongous rate of $50bn a year, investors could be more forgiving. Aside from ISM, the macroeconomic watch will be relatively quiet for the rest of the day. With a swathe of Europe joining Asia on holiday, direction could be static. Alternatively, further developments in the erratic progress of U.S. overseas trade policy could stoke volatility.