Autumn has started and the weather is getting rough – but the markets are experiencing a second spring.......
Stefan Rondorf Senior Investment Strategist, Global Economics & Strategy
Two US benchmark indices, the S&P 500 and the Nasdaq Composite, are climbing to ever new record highs, and the European and Asian equity indices, too, have performed well during the last few weeks. And in Germany, it seems to be only a matter of time until the benchmark DAX index rises above the threshold of 13,000, thus achieving a total return (including dividends) of 254% since its low in March 2009. The markets for highyield and emerging markets bonds are doing well, too.
These developments are somewhat surprising, seeing that many observers believe that the US growth cycle (which plays a key role for market sentiment) should have reached the autumn of its life after just over eight years. However, the economy is still blooming. Years of a highly expansionary monetary policy are propping up growth around the world. In particular, the unusually slow uptrend in wages and the “shale age” in the oil sector point to a period of robust growth without immediate inflation fears. On top, White House proposals for tax cuts and a streamlined tax system have rekindled hopes of fiscal stimulus in the US.
After years of widening multiples across different asset classes – a development which was fuelled by low interest rates and abundant central bank liquidity – at least the equity market can now rely on another supporting factor: healthy earnings growth. At the beginning of the reporting season for the third quarter, US analysts in particular seem to be relatively subdued, even though companies have made fewer efforts than usual to dampen expectations. Earnings growth forecasts for the market as a whole recently came in at only 2.8% and were dampened by the insurance sector in particular, which suffered from the hurricanes. With growth overall robust during the third quarter, companies should find it easy to exceed these expectations. Estimates for Europe are slightly higher, at 5.4%, but still appear quite cautious.
The Week Ahead
Political events will shape the coming week. Two elections will take place, one in Austria (on 15 October) and one in Japan (on 22 October). In Austria, the right-wing populists are expected to do, well, but this is unlikely to lead to major political changes in Europe. In Japan, Shinzo Abe will probably be re-elected, if with a smaller majority. Everything points to a continuation of “Abenomics”, and the Bank of Japan looks set to stick to its generous monetary policy for now. In China, the convention of the Communist Party will be in the limelight from Thursday. And the current sources of political uncertainty in Catalonia (separation efforts), Washington and Pyongyang will not dry up either.
In addition, the following data will be released:
Inflation figures for China (Monday) and the UK (Tuesday): will the global reflation trend continue?
Chinese GDP figures for the third quarter (Thursday): according to the consensus, the world’s second-largest economy will register a growth rate of 6.8% and thus continue to make a strong contribution to the global expansion.
Understand. Act. Do the sudden spring feelings in the market mean that the stormy autumn season is over? Certainly not. Potentially, the bond markets might react suddenly to a surprisingly strong pick-up in inflation which might be accompanied by less central bank stimulus (remember the “liquidity peak”), and economic activity will start to slow down sooner or later. In the short term, however, we continue to expect further support from earnings growth.