Market Overview May 2018
Corporate profits, revenues and management outlooks helped to bolster a stock market narrative which had been dominated by trade tensions and regulation of technology companies. Although, some of these fears have not been completely diminished, the earnings reported have been positive for equity markets and highlight the continuing resilience and growth of some of these companies.
Strong earnings growth has been demonstrated by the most recent earnings season investors have experienced. US corporations are reporting their best profit gains in more than seven years and a record number are beating Wall Street forecasts. With over half the S&P 500 finished reporting, the largest US companies are on track to demonstrate earnings per share growth increase of 23.2% compared to a year ago. This would be the highest rate of growth since the third quarter of 2010. Whether this earnings growth is peaking remains to be seen. There are some indicators which could diminish profits in the future i.e higher interest rates, inflation and an increase in commodity prices. However, analysts have argued that we have still yet to see the full impact of Donald Trump’s tax reforms and this will continue to have a sustained positive impact on earnings.
Positive economic growth evident across major economies is allowing central banks in the United States, Europe and elsewhere to begin tightening some of the monetary policy endorsed immediately after the global financial crisis. The growing economies have led to fuller labour markets which could push up salaries. Rising wages could result in higher inflation and, in turn, a faster pace of short-term interest rate increases by central banks. This retreat of monetary policy by central banks led some investors to begin profit taking as they believed companies could not sustain their growth without the cheap and easy money they could obtain from central banks. However, the positives of a more stringent monetary policy from central banks is that it demonstrates that economies are growing and this is positive for the earnings growth of corporations.
At the latest summit in Brussels, the other 27 European Union (EU) countries signed off a 21-month transition period and adopted the guidelines on the bloc’s approach to a future relationship with the UK, covering trade, security and other issues. European leaders decisively endorsed the start of negotiations on future connections with the UK and a transition that would prolong the UK’s transitional membership of the EU until the end of 2020. Theresa May welcomed a “new dynamic” in the negotiations, while Michel Barnier, Brussels’ chief Brexit negotiator, suggested that the European Union was “crossing a decisive point in this difficult and extraordinary negotiation”.
The Prime Minister suggests that the government can agree a deal that provides for trade that is “as frictionless as possible”. However, EU negotiators and some government ministers believe this can only be guaranteed if Britain remains part of the customs union. There are also indications that the House of Commons could vote to keep Britain in a customs union especially with Jeremy Corbyn’s announcement that the Labour party now supports membership of the customs union. If some of the more Europhilic Conservative Members of Parliament choose to support Labour’s stance then this could disrupt Theresa May’s vision for Brexit.
It has been a turbulent time for the Conservatives since they lost their parliamentary majority following the snap election. Theresa May’s government is under immense pressure after the fourth cabinet minister in six months stepped down. The Prime Minister has challenges domestically and abroad, whilst attempting to keep her party united and manoeuvring through a crucial period of the Brexit negotiations.
Onto economic factors, and the likelihood of an interest rate hike by the Bank of England in May is now looking less probable. UK economic growth unexpectedly fell to its slowest rate in five years after the Office for National Statistics stated that its first estimate of GDP growth for the first quarter of 2018 was just 0.1%. The consensus forecast among UK economic analysts was for growth of 0.3%. Mark Carney, the Governor of the Bank of England has also stated that there are other meetings/opportunities in the year for the central bank to raise rates, perhaps suggesting that an immediate rate rise in May is now unlikely.
There has been small indicators that the eurozone recovery is beginning to slowdown. Surveys of sentiment and manufacturing data indicate that first-quarter growth is likely to be weaker than previously expected. Forecasts are already being revised downwards amid fears that the region’s recovery may have peaked and that trade tensions have added food for thought for economic analysts. Some have pointed this slowdown to the impact of the European Central Bank’s quantitative easing policy may have beginning to fade, now that asset purchases have been reduced from €80bn a month in 2016 to €30bn. Purchasing Managers Index, the measure of expansion or contraction for sectors across the economy, is still above the level of 50 across all of the major economies in Europe and this is currently still positive for economic growth.
Mario Draghi, the European Central Bank (ECB) president, however, has accepted that there has been a “moderation” in the strength of the eurozone recovery. As of yet, he has signalled no change in monetary policy. Draghi stated that he still believes the asset purchase programme should remain at least until the end of September. Analysts suggested that Mr Draghi’s defensive language implied that the ECB may wait until July — a month later than previously expected — to provide the markets with updated “forward guidance” on its plans to phase out the crisis-era stimulus. However, policymakers have previously indicated this could be extended depending on economic indicators/forecasts closer to the time.
On an historic day of diplomacy, the leaders of North and South Korea have now promised to end the formal state of war that has persisted between both nations for nearly 70 years. At a momentous summit, decades of war and ambivalence between the two countries were briefly put to one side as Kim Jong Un made the first visit by a North Korean leader to the South and was welcomed by his southern counterpart, President Moon Jae-in. The meeting marked the culmination of whirlwind diplomacy that has taken the two Koreas from the edge of war to discussing peace within four months. North Korea has also promised to close its nuclear test site by the end of May and has invited foreign inspectors to verify the closure. World stability is important for markets and the pacifying outcome of these talks could provide a more positive backdrop for growth.
Donald Trump has now managed to push through his tax reforms which is likely to be beneficial for US corporations and a boost for earnings.
The ongoing Brexit negotiations will continually be at the forefront of investor’s minds until a trade deal has been granted.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the date stated above, and are subject to change. The update is for information purposes only. Source: Financial Times