Despite a stream of disappointing economic data, most global markets performed well this week. Equity indices in London, New York, Tokyo and Shanghai were all comfortably ahead, even as the threat of a global slowdown loomed larger.
PMIs – pretty miserable indicators?
Some of the weakest data came from Europe, where the final purchasing managers’ indices (PMIs) were lower than the ‘flash’ figures published earlier. The Eurozone manufacturing PMI came in at 47.2, well below the 50 level that indicates economic expansion. Composite PMIs were generally better, thanks to stronger services figures, but the overall picture was fairly bleak.
In the UK, however, the opposite pattern applied. With a comfortably expansionary 55.1, the manufacturing PMI hit a 13-month high. The main reason for this appears to be stockpiling in case of a hard Brexit. Meanwhile, the services PMI showed a decline, leaving the composite index at a neutral level of 50.
China’s PMIs were slightly better than expected. The rest of Asia undercut the better Chinese data, however. In Japan, South Korea, Malaysia and Taiwan, all the main PMIs deteriorated and came in below 50. Japan’s Tankan survey showed particular weakness in manufacturing.
However, we think that this could be the ‘darkest hour before the dawn’ moment in the Eurozone. Hard economic data such as German industrial production are turning up (although admittedly factory orders remain weak). We expect a pickup in economic activity later this year.
In the US, there was a drop in February’s retail sales, which were down 0.2% from January. Investors had expected a 0.2% rise. Any suggestion that US consumers are tightening their belts is unwelcome news for the rest of the world.
Orders of durable goods at US factories also fell. This was, however, a little less bad than had been feared.
Winds of woe
The week’s lacklustre data stoked concerns about the direction of the global economy. Last week, Credit Suisse was the first major financial institution to predict a recession. This week, credit agency Moody’s said a recession was “highly likely” if the US-China trade war was not resolved within the next three months.
The World Trade Organisation (WTO) also struck an ominous note by warning of “strong headwinds” facing global trade. According to the WTO, trade grew by 3% in 2018, well short of the 3.9% forecast issued earlier last year. Our analysis suggests that while the risk of a recession is rising, we have not yet reached probabilities consistent with a recession being more likely to occur than not.
If investors had thought that last week’s theoretical Brexit deadline would provide some certainty, they were sorely disappointed. After a series of indicative votes confirmed only that there is no majority in parliament for any course of action, UK Prime Minister Theresa May was forced to turn to the Leader of the Opposition to attempt to thrash out a compromise. In response to the twists and turns in Westminster, sterling ricocheted around in the currency markets, though it was little changed over the week against the euro.
The next argument with the European Council (EC) will be over a ‘Flextension’ (‘Brextension’?); Theresa May would like the 30 June 2019, while EC president Tusk has indicated that the UK must remain in the EU until 2020, unless parliament passes the withdrawal agreement which would allow early exit. In response to the twists and turns in Westminster, sterling ricocheted around in the currency markets, though it was little changed over the week against the euro.
Glass half full?
But in the face of all this uncertainty, most global equity markets had a good week. Investors seemed to take heart from the positives scattered among the disappointments. They were also encouraged by signs of progress in the US-China trade negotiations. “This is an epic deal – historic – if it happens,” said President Trump.
And the economic gloom has a silver lining too. Investors will have considered that weaker data will further dissuade the world’s central banks from interest rate rises. With rates set to be ‘lower for longer’, the protracted period of cheap money might have a good bit further to run.
Almost all developed markets had a positive week. The best returns came from Europe, where Finland, Sweden and Austria led the way. With Singapore and Hong Kong to the fore, developed Asian markets performed well too. Over the week to the close on Thursday, the FTSE 100 index was up 1.8%. In the US, the S&P 500 index climbed 1.6% and the FTSE World Europe (Ex-UK) index rose 2.4%.
And finally …
With Easter approaching, the animals on most people’s minds are bunnies and chicks. But not so in the Belgian coastal town of Adinkerke.
Last week, gull-fanciers flocked to Adinkerke for the European Gull Screeching Championship. The assembled contestants competed to deliver the most convincing squawks. The prize? A basket of Belgian beers.
The contest was a freestyle event, though most competitors opted to imitate the herring gull. Arm flapping was optional but encouraged: a quarter of the contest’s score was for performance.
Fortunately, that performance didn’t extend as far as rifling through bins, redecorating pavements or snatching chips from passers-by.