MARKET OBSERVER – N° 121

The stock markets, during the month of May, remained faithful to the tradition that sees it as a negative period for international stock markets, having registered the first, albeit modest, correction of the indices since the beginning of the year. Apparently the decline in prices did not depend on fundamental elements since the preliminary data on the quarterly dynamics of the respective national GDPs and the trend of the profits announced in April by the US companies, did not lead to surprises, while the negative phase was attributed to the abrupt interruption of trade negotiations between the US and China. But we must consider that investors always find an excuse to easily realize paper profits, especially when they have surprisingly matured in a short period of time, as has happened since the beginning of the year. In fact, the question of trade relations between the two world economic leaders, transcends the mere competitiveness of the price of the respective goods, since it is actually a fundamental political question, which sees the United States engaged in slowing down as much as possible, the inexorable economic progress of the Asian giant, destined to prevail in the long term.

Therefore, the true motivations of the correction that began at the beginning of May must be traced back to their fundamental origins, which are linked to the strong negative reaction of the international indices at the end of 2018. At that time the market’s fears were motivated by signs of global economic cooling and by the belief that the central banks restrictive monetary policy had gone too far. The apparent about-face of the FED and the modest progress in the quarterly GDP of the primary economies, have temporarily put aside these fears, which are now reappearing.

In the USA the forecasted figure for GDP growth, 3.2%, if analysed, consists of a 2.7% increase in public spending and a balance made up mainly of an increase in inventories. In essence, the government was worried about the real health of the economy while companies were caught off guard by the Fed’s change of course. However, judging by the recent trend of one of the most important short-term indicators available, the PMI relative to corporate purchase orders, which fell to 52.8% in April, a decline of 2.5 percentage points, and to the coincident constant increase in high yield credit spreads, the economic situation is actually cooling. The outcome of the next meeting of the Fed’s directorate, scheduled for June 19th, will help to clarify the strategy of the monetary authority, since a reduction in the base rate cannot be excluded in order to support the economy, which Wall Street would not appreciate. So the age-old question of whether the bond market is right where, since last October, the yield curve has been flat, indicating an impending recession, or the stock market, after a marked rebound from the autumn decline, could be close to being answered.

In fact, the US economy could weaken beginning this summer, without entering into a recession, but not justifying the valuations achieved by stocks that are indeed suffering from a slowdown in profit growth. The S&P 500 index, after reaching the high this year of 2955, has gradually reversed, touching the 2800 level, without however testing the technical support at 2780, whose failure projects the 2700 level. The next trading sessions are crucial to determining whether the fixed income or the stock market is right; the fact remains that they will not be able to continue going in the same direction for much longer.

Nicola Bravetti Data Source: Bloomberg