A week of positive news – the markets are buoyed
- Equities rally as the geopolitical landscape is interpreted more favourably
- European Central Bank might have limited firepower but has just about met the markets’ admittedly quite punchy expectations
- China and the US have embraced the idea of scaling back on tariffs and are now involved in a positive cycle of reciprocation
- Friday sees China announce support for purchases from the all-important US agricultural sector
Global stock markets have shrugged off August’s correction and now, halfway through September, are touching new highs. The S&P 500 opened Friday’s trading session 20 basis points up from the previous night’s close. It has found the momentum to break through the important 3,000 barrier and is only a fraction off its 52-week high price of 3,027. The index is up 4.33% over the last one month period. Michael Sheetz of CNBC noted:
“A crazy last 24 hours has put the market inches away from a record.” (Source: CNBC)
S&P 500 Index — Price chart — Five days:
The reasons for the rise in the markets are quite diverse. It’s been a week when investors have seen the positive side of most events. Even the smaller aspects have gone the right way. For example, the movement of storm Dorian up the East coast of the US was a reminder of how fortune can be against you. Instead, it failed to cross mainland US, and by Friday 6th, ports in the Carolinas and Virginia had reopened.
Pork and beans
The week’s news flow ended on a high when on Friday the Chinese administration announced it is to encourage state-owned companies to begin purchases of pork and soybean imports from the US. A range of agricultural goods will also be exempt from additional tariffs. The fact that China desperately needs the goods didn’t prevent the authorities there from tagging the initiative as ‘an act of goodwill’.
The editor of the media outlet Global Times is something of a mouthpiece for the Chinese government and shared the rather loaded comment:
“It is hoped the US side can keep goodwill reciprocity with China through practical actions.” (Source: Twitter)
Investors and analysts would be excused for sharing an element of frustration. At least for now, even if both sides are scaling up on rhetoric, they are most definitely scaling down on tariffs. The markets are hoping the respective governments continue unwinding.
On Tuesday, the UK government started a month-long suspension. With Westminster debate turned down a notch, it was time to listen to reasons why a deal might be possible. By Friday, it was even being suggested that the Northern Ireland backstop might be fixable. The BBC News website reported:
“The unionist party had agreed ‘to shift its red lines’ as part of a new deal to replace the backstop.”(Source: BBC)
GBPUSD — 02/9/19–13/9/19
As European markets neared their weekly close, GBPUSD was trading in the area of 1.245, which represented an upward shift of 4% over the previous 10 days.
European Central Bank
The European Central Bank (ECB) announced on Thursday that it was cutting interest rates and at the same time would restart its quantitative easing programme. The ‘forward guidance’ from Mario Draghi stressed the need for inflation to kick in before any change of direction is to be considered. Leaving the QE program open-ended was a suitably dovish welcoming gift for the next chair, Christine Lagarde, who takes over on 31st October 2019 and looks more than willing to steer the same course.
Past performance — September
September can be a cruel month for stocks. Data records going back to the 1940s highlight the month as being the only one in the calendar that has posted more negative than positive returns. Looking at records as far back as 1928, the S&P 500 has on average lost about 1% in September — making it by far the worst month for stocks. An optimist might point out that over the last 10 years, September has posted positive returns in 60% of cases. What sounds like good news ought to be tempered by the fact that the relatively small percentage point increase has occurred during one of the longest and strongest bull runs in stock market history. Should the S&P 500 index end the month as it has started, then we could be looking at a positive percentage return over the last 11 years of 64%.
Past performance — August
The devil is in the detail and analysts at LPL Financial are offering an alternative view — one that will appeal to the bulls. They report that since 1985, every year where the S&P 500 posted a negative return for August, the markets ended up at a higher level 100% of the time.
Market greybeards, who have learned through painful experience to take caution in September, may still be proved right. Even if the historical data for August, as referenced by LPL Financial, does prove correct, it would be highly unlikely that the path to that positive return will be without a few shake-downs.
The CBOE VIX index has dropped to below 14. As the greybeards like to point out, it’s when the markets are most complacent that the ‘thing’ happens. With so many geo-political hotspots currently in play, there are plenty of possible sources for a shock.
Next week sees the US Fed give its report on the US economic outlook and its monetary policy response. US data out this week has been weak enough to justify that Jerome Powell has room to cut rates but not enough to shake the markets out of their upward trajectory. Whether his actions meet the expectations of the currently effusive markets is another question.