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US
US markets were dominated by economic data and monetary policy this week, and after a somewhat lackluster start, we saw some very solid gains on Thursday.
In another sign that the world’s largest economy is slowing, the Institute of Supply Management’s index of manufacturing showed that the US economy contracted for a third consecutive month – however the news was embraced by the market as experts were expecting a much lower reading.
Sentiment was also bolstered by a solid read on consumer spending, which came in at twice the forecast amount in March – up 0.4%. Certainly an encouraging sign, especially when you consider that 2/3rds of the US economy is driven by consumer spending.
The embattled greenback managed somewhat of a turnaround, despite a further 25bp cut by the Federal Reserve. Traders were instead focused on indications that the Federal Reserve may have finished with its current round of easing, and is instead turning its focus towards fighting inflation.
Strength in the greenback in turn acted to help oil further decline away from last weeks record levels – which dropped around 6% below the US$120/barrel we saw last Friday.
Thursday’s session saw the Dow crack the 13,000 point mark for the first time since January the 3rd, with the index having now put on over 10% since hitting its low for the year on March the 10th.
Asia Pacific
After failing to make any significant moves for most of the week, Asian markets found form on Friday as investors found inspiration in the Dow’s return to levels above 13,000.
Across the region, banking stocks were among the better performers as bargain hunters snapped up oversold shares on the back of improved optimism.
A firmer greenback acted to send metals prices lower, and this did limit the performance of the big miners in Australia. Likewise, energy related stocks pulled back in line with the decline in oil prices.
In Japan, a firmer yen acted to support exporters, while stronger than expected US retail spending data also improved prospects.
UK
Although the London FTSE failed to see any real movement by Thursday, investors did find comfort in a statement from the Bank of England, which said that confidence and risk appetite would return later in the year, and that the worst of the credit crisis was over.
But the month of April ended on a high during the week, with the local bourse posting its biggest monthly gain in five years. During April the FTSE 100 gained 6.8% thanks in part to a solid performance from oil companies.
At this stage, it looks like investors are awaiting for further reason to buy before they are willing to extend these gains. As usual, the US situation will be monitored very closely.
End note
Although it looks like confidence is returning to the market and outlooks are improving, it’s likely that any sustained rally will be impeded by sluggish economic growth in the US, at least for the next few months.
Of course, the situation is looking better now than at any other time in the past 6 months, but economic recoveries don’t happen overnight. The expectation for the coming months is for the market to remain range-bound until the underlying fundamentals show real improvement. But at least this view means that we have seen the bottom, and are unlikely to break support levels any time soon.
Happy Investing!
Andrew Page
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