Global Markets Weekly - 14 April 2009
- The recent equity rally has been driven by policy moves and less-bad data.
For the past month, equity investors’ confidence has benefited from a number of indirect, non-corporate drivers. The largest single daily move in most developed markets followed the announcement of the US Treasury’s plan to remove ‘legacy assets’ from banks’ balance sheets. And sentiment see-sawed around, but ultimately benefited from, the outcome of the G20 London summit. Some high-level lead indicators of manufacturing activity also turned less negative in several countries.
- Now the focus is switching to corporate earnings...
More recently, however, the equity market’s focus has become more parochial and down to earth, as the US first-quarter earnings reporting season starts in earnest next week. The guidance from first-quarter dividend payments offers little encouragement: the $77 billion decline in dividend payments from the 7,000 global companies that report to Standard & Poor’s is the largest since records began in 1955. Nor can this steep fall be attributed to financial companies or any other individual sector. The ratio of companies reporting a dividend increase relative to those reporting a decrease is three to four, also the worst since 1955, showing how widespread is the decline in dividends.
- ...and the rally has stalled. Weaker sentiment has also affected credit markets and gold. Last week, the rally in equity markets stalled, and this aggregate reassessment of growing risk appetite by investors has also affected other markets. Credit spreads, which had narrowed consistently throughout March, were broadly flat last week, while gold – that widely watched indicator of investor risk appetite, which fell 12% from its March peak – has also rallied and remains above its 6th April trough.
- Sentiment is broadly neutral - around the levels where earlier rallies have failed.
The Coutts Investor Sentiment Indicator captures the dilemma facing investors. Over the past month, risk assets have benefited from – and gold and government bonds have suffered from – an increase of risk appetite from very negative to broadly neutral levels. This is the ‘easy’ first stage of a rally, and it is at this point that the bear-market rallies of 2008 failed. Faced with the grim economic reality of a dysfunctional financial sector and collapsing global trade, equity investors couldn’t take the step into outright optimistic territory. Since July 2008, investors have remained resolutely pessimistic and defensively minded, albeit to varying degrees (see chart on next page).
- For the rally to be sustained, we need to see positive corporate news...
Perhaps not coincidentally, this crunch point for the current rally has arrived just as the first quarter earnings season is due to start. We think that an extension of the equity rally from this point now requires some concretely positive corporate news – evidence that companies are coping better with the downturn in demand than analysts had been expecting. This is more likely in some regions than in others. In particular, the acceleration in US job losses since mid-2008 suggests that companies are restructuring more aggressively in the US than in Europe, as the US both has a more flexible labour market and was one of the first to experience the current downturn in demand.
- ...so the next two weeks should signal whether this rally can become more sustainable.
The past month’s equity advance shows many hallmarks of a bear-market rally, and we on balance expect a corresponding period of weakness. There are risks to this view, especially the trend of less-bad economic data. Indeed, the arguments of both bulls and bears are likely to be rigorously tested over the coming fortnight. The outcome will be a clearer answer to the question of whether the rally of March 2009 was indeed just another false dawn or the start of something more significant.
Indices, Interest rates and Inflation
|
Close - 9 Apr 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,034 |
0.0 |
7.1 |
-7.6 |
-32.8 |
|
FTSE 100 |
3,984 |
-0.3 |
6.1 |
-9.4 |
-31.3 |
|
S&P 500 |
859 |
2.8 |
13.5 |
-1.5 |
-38.5 |
|
Nasdaq Composite |
1,653 |
2.9 |
15.5 |
6.9 |
-40.5 |
|
DJ Stoxx (Europe) |
208 |
2.8 |
14.0 |
-6.1 |
-46.3 |
|
Nikkei 225 |
8,294 |
0.8 |
17.0 |
6.1 |
-42.1 |
|
Hang Seng |
14,901 |
-0.6 |
19.0 |
9.0 |
-48.3 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Mar-09 Forecast |
Jun-09
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0-0.25 |
0-0.25 |
0-0.25 |
0.2 |
29-Apr |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
3.2 |
07-May |
|
Euro-zone (Repo Rate) |
1.25 |
2.00 |
1.00 |
1.2 |
07-May |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-0.3 |
30-Apr |
View the full Global Markets Weekly report (pdf).
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