Buoyant markets have resulted in an infectious optimism, with markets wanting to see the positives in individual data releases (e.g. Chinese manufacturing PMI) or policy developments (e.g. around U.S./China trade talks).


1. Continued U.S. equity gains – in the wake of the best Q1 since 1998 – are lifting other equity markets and other risky assets too.

Further S&P 500 gains this week have built on the best first quarter for the index since 1998 (page 2). The U.S. rally was broad based and has carried over into other equity markets with the MSCI World Ex-US index rising 10.6% in Q1. Credit spreads have reversed course and core government bond yields have also been ticking upwards (although many remain extremely low). And, as we discuss on page 7, equity market gains may also have contributed to recent gains in crude oil prices, already bolstered by evidence of continued OPEC+ production restraint and other supply constraints. Conversely, positive market sentiment has also put downward pressure on gold prices.

 

2. Some better recent Chinese data may suggest that policy-makers’ efforts have now started to turn this economy around.

Markets took great heart from news that China’s manufacturing PMI had beaten expectations in March, reaching its highest level in six months (page 5). This was seen as an indication that government stimulus measures were working and there have been other positive macro indicators in China recently, such as the double-digit electricity production growth and better trade and cargo shipments. We argue that the Chinese economy may already have bottomed out and we would expect to see further improvements from Q2 onwards. However, it is too early to give this economy a clean bill of health and the devil is in the data detail: note that the new export orders manufacturing component continued to indicate contraction in March.

 

3. European market gains however sit uneasily with German and other data disappointments and continued hard Brexit risks.

As they say, a rising tide lifts all boats, and European equities have not been immune to this (page 6). European market gains have happened despite further data disappointments, for example around March Eurozone manufacturing PMI (page 3). Recent German sentiment-based and hard data (e.g. PMI, factory orders) has also suggested that all is not well in Europe’s largest economy, not helped by continued concerns around external demand. There must be worries as for how long European markets can defy the downwards pull from either economic fundamentals or possible future earnings revisions. Meanwhile, the Brexit saga rumbles on with two new developments this week (cross-party talks, legislation seeking an Article 50 extension) not removing the threat of an abrupt departure. GBP moves have however been muted, suggesting that optimistic markets’ attention may have gone elsewhere – for now.

 

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