Market falls over the last week reflect increased political concerns and mixed economic and corporate data, particularly in Europe. But your assessment of current market developments will be affected by where you are.


1. Poor Eurozone PMI have added to economic concerns. Corporate earnings disappointments have added to the gloom.

Poor Eurozone purchasing manager indices (PMI) this week have added to the impression that the Eurozone recovery could have stalled (page 3). In the heavily export-oriented German economy, global trade concerns have been compounded by problems specific to the car sector, bringing down the Ifo Business Climate Index as well as the PMI (page 4). And with European corporate earnings proving disappointing in the early stages of the current reporting season, and the Italian budget and Brexit problems continuing to cast long shadows, it is no surprise that European equities continue to struggle (page 6).

 

2. By contrast, Q3 U.S. corporate earnings have got off to a good start and economic data has softened only slightly.

In the U.S., the tone remains rather different. Markets remain volatile, with some particularly sharp sell-offs in the tech sector. According to the advance reading published today, U.S. GDP growth of 3.5% in Q3 (QoQ annualized) was slightly down on 4.2% in Q2. Some housing-related data has also been softer. But, in marked contrast to Europe, the Q3 earnings season has generally reassured. Of the just under 40% of companies that have reported so far, around 80% have reported earnings above analysts’ expectations (page 2). This is well above the long-term average of 64%, although the surprise factor (measured by the percentage that earnings have been above expectations) has fallen back slightly compared to the last four quarters. Markets have historically been volatile in the run up to the mid-term elections (November 6) and recent falls seem to represent more of a dialling down of expectations rather than a reassessment of the economic and investment outlook.

 

3. Korean GDP data suggests that a Chinese slowdown will impact investment – not just exports.

In Asia, Chinese equities initially reacted positively at the start of the week to a raft of official policy support measures, then retreated, then rose again. Further large swings in these markets are likely, but will create opportunities – this week, we have launched a new High Conviction Idea on Chinese equities. Market swings should also not stop a careful assessment of the extent of China’s economic problems and their possible impact on its Asian neighbours. On page 5, we look at the recently released Korean Q3 GDP data. Export growth fell only slightly in Q3, but there was a sharp decline in investment as firms became more cautious due to China concerns: this reminds us that sentiment can have a rapid impact on the real economy, as well as financial markets.

 

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In the EMEA region this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk.
 
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com