Despite all of the black clouds hanging over financial markets (although they are fading), the triggers for the stock market rallies from New York to Athens were China’s 7.6% annualised economic growth rate (which was the worst since early 2009) and an earnings report from JP Morgan on Wall Street. Both were better than expected.
A rally starts today on the local market, but has it got legs?
Well, it is highly likely we will see a few days of positivity and undoubtedly US reporting and economic data will have a big bearing on this expected rally. It’s a huge week this week; have a look what is due out:
- In the US, there’s retail sales, manufacturing in New York state, business inventories, the Consumer Price Index, industrial production, housing market index, housing starts, the Beige Book of economic activity, existing home sales, the Philadelphia Fed survey as well as the leading indicators.
- Crucial company earnings from Citigroup, Coca-Cola, Goldman Sachs, Intel, Bank of America, Morgan Stanley, Google, Microsoft and GE.
- Australian data takes a backseat, with Reserve Bank of Australia (RBA) minutes, new car sales and building activity data being the most important.
- Also the US Federal Reserve chairman Ben Bernanke will speak and Wall Street analysts will be looking long and hard for any hint that QE3 (a third quantitative easing package) is on the way. In fact, a bad week of economic data could seal QE3 for the next US monetary policy meeting.
Driving a rally
These are the known unknowns ahead, but it will be the unknown unknowns – that is, the left field events (from Europe in all likelihood) – that could determine how long this rally lasts.
Undoubtedly it will end sooner than we want, but I still see, on net, things to create the end of the bear market are gradually happening and Europe is the main game. This is because recent economic weakness in both China and the USA can be sheeted back to Europe’s leadership mistakes as well as the economic consequences of these poor decisions and comments.
Matt Sherwood, head of research at Perpetual doesn’t give this rally too many legs.
“Nonetheless, the two month battle between growth bears and value hunters is unlikely to be resolved anytime soon as it appears hard for global growth to lift much from here,” he insists.
But it was a lucky Friday the 13th, where black meant stock markets avoided the red. The markets of Germany (+2.2%), France (+1.5%) and the UK (+1.0%) led the gains, but the dodgy markets of Portugal (+0.9%), Italy (+0.9%) and Spain (+0.5%) were less convincing.
Against these rises, I liked Greece’s market putting on 3.6% and while I don’t want to read too much into it, it could be a positive sign.
Europe’s impact on global growth will be the main focus for stock markets between now and the end of the year. If we get some surprisingly good company reporting and US economic data (which I think could be challenging) then with the better China news, markets could head up.
Right now, the impact of past economic news has seen the Asian Development Bank cut growth estimates for emerging Asia from 6.9% to 6.6%. Emerging Asia is important for the global growth story, with Europe, the USA, China and Japan struggling, growth-wise, at the moment.
The big watch for me is the bond yields on Spanish and Italian bonds. If they come down, then Europe’s leaders are cutting the mustard. If they manage this culinary task, then it might be time for investors to get back into the kitchen because the heat will be coming down to a much more tolerable temperature for those who are in cash.
Can we hope for lower bond yields? Well, we are seeing them already, but it is early days. A recent €3.5 billion auction of Italian three-year bonds saw yields fall to 4.65% from 5.3%.
This rally will be challenged, but we are getting closer to that time when a rally will last and that’s when stocks will surge.
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