16 March 2017
Positive signs raise investors’ hopes of synchronised global growth
Global share markets enjoyed a mostly positive month in February, powered by consolidating signs of an improving economic outlook and limited upside pressure on both bond yields and the US dollar.
In the second half of the month, all eyes were on the US indices, which were setting records almost everyday. Only the last day of February snapped the blue-chip Dow Jones Industrial Average’s historic bid to record 13-straight record closing highs: the Dow’s 12 consecutive days of record closes was its longest record streak since January 1987.
The Dow also had a good crack at its longest streak of rising days (not record highs), racking up 12 consecutive trading-day rises: that was its best effort since a 14-day rising streak, set back in 1897. US 10-year Treasury bond yields eased back to 2.39% from 2.45%.
Even with its attempt to break its own record falling short, the Dow Jones ended the month 4.7% higher, while the broader S&P 500 added 3.7% and the Nasdaq Composite advanced 3.7%. At its all-time high of 2371.54 points reached in February, the S&P 500 achieved a total market capitalisation of $US20 trillion ($26 trillion) for the first time.
Trump trade continues, earnings, consumer confidence also push US market
The US indices were partially driven by the continuation of the ‘Trump Trade’ as markets bought-in to the anticipation of the new President’s reflationary ambitions, ahead of a major Trump speech billed for early March, while trying not to be unnerved by some of the unconventional behaviour of the White House. Also helping was a robust fourth-quarter corporate reporting season in the US – S&P 500 earnings grew at an annual pace of 4.9% – as well as encouraging economic data around the world, stronger consumer demand and continued strengthening of manufacturing conditions. Investors are hoping that signs of a pick-up in China and Europe can be boosted by the rollout of stimulatory policies of the new US administration.
The last day of the month brought a revised fourth-quarter reading showing that the USA’s gross domestic product (GDP) grew by 1.9% on the year, which underwhelmed many expectations. The economy grew 1.6% in 2016, its worst performance since 2011, after recording 2.6% growth in 2015. However, consumer spending – which accounts for more than two-thirds of US economic activity – was revised higher for the fourth quarter, from 2.5% annual growth to 3%, providing solid grounds for optimism.
The Conference Board’s Consumer Confidence Index also rose to 114.8 in February, a better-than-expected number, and the highest reading since July 2001. Buttressing this was February’s final reading for the University of Michigan Consumer Sentiment Index, which came in at 96.3, down from its January mark of 98.5, but well above the 91.7 reading of a year earlier. Despite the descent, this index has strung together its best three months since early 2004.
As well as the US consumer, the world’s purchasing managers have also become upbeat – and because the Purchasing Managers’ Indices (PMIs) are forward-looking, they carry a lot of weight. Global PMIs have been trending higher since early-to-mid 2016, and the most recent data showed the Institute for Supply Management’s US factory index rising to 57.7 in February, its sixth straight gain, while the Markit Eurozone Manufacturing PMI also lifted for a sixth consecutive month in February. Preliminary French and German composite PMIs soared in February to reach 69-month and 34-month highs respectively.
In China, the February official manufacturing PMI rose to 51.6 from 51.3, beating forecasts. The private Caixin Manufacturing PMI – which focuses on smaller and medium-sized businesses – for February was 51.7, a lift on January’s figure of 51, while the Non-Manufacturing PMI – that is, the services sector – contracted to 54.2, from 54.6 in January.
In Japan, the Nikkei Manufacturing PMI for February was at 53.3, which, although slightly down on January’s reading of 53.5, indicated that Japanese manufacturing continues to expand (a PMI reading above 50 means expansion; below 50 indicates contraction.)
These are not arcane numbers - they reveal the confidence of businesses in economic conditions, and PMI expansion is seen as a pointer to economic growth. And what is getting investors excited is that these numbers are raising the possibility of synchronised global growth. Bloomberg economist surveys show that no Group of 20 (G20) economy is expected to post a decline in output this year, which has not happened since 2010.
Synchronised growth would mean the global economy would not need to rely on the US to generate growth, which could help to ease the upward pressure on the US currency. Synchronised growth would give Europe a chance to make further inroads into unemployment; European data in February showed job creation was the best seen for nine and a half years. Synchronised growth would also ease pressure on the Chinese authorities to stimulate the economy, while simultaneously bringing bank lending under control.
Reflecting the generally positive tone, in Europe the STOXX 600 index gained 2.8% in February, with the DAX in Germany up 2.6%, the CAC-40 in Paris up 2.3% and the SMI in Zurich adding 3.1%. The UK’s FTSE-100 index advanced by 2.3%.
In Asia, Japan's Nikkei stock index ended up 0.4% for February to be almost flat for the year to date, as the shares of major exporters came under pressure from yen gains. In China the Shanghai Stock Exchange Composite Index posted a 2.6% gain for the month, the Hang Seng in Hong Kong was up 1.6%, while in Seoul the KOSPI added 1.2% for the month. In Australia, February saw the S&P/ASX 200 gain 1.6%, while the broader S&P/ASX All Ordinaries index appreciated by 1.5%.
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