Is market sentiment turning?

3 November 2015

The past week was full of China and European Central Bank (ECB) news - at least if you are following the UK media. The state visit of China's president Xi Jinping brought much focus to the UK's relationship with China, while ECB president Mario Draghi's strong hints for more monetary easing later in the year, pushed up stock markets by more than his now famous '˜whatever it takes' statement in London in July 2012. China is certainly worth the UK's special attention, because, as my old colleague Jonathan Ashworth - now UK economist at Morgan Stanley noted: 'China is now the UK's sixth-biggest export market and the third-largest source of imports. Moreover, China is now the top export market for several sectors such as car manufacturing and higher education, and is growing rapidly in tourism.' As discussed here at length in the past, China has become the 2nd largest economy in the world after the US and the slowing of its economic rate of growth has caused stock markets great concern over recent months. China's leadership is taking its economic responsibility very serious and more important than the UK visit of its president, was probably the Bank of China's announcement on Friday of another cut in interest rates. Stock markets at that point had seemingly run out of interest in good news and may have even begun to worry once more what the central bankers can see in terms of bad news that would justify further monetary stimulus. Monetary stimulus had been the driver for the past week's strong stock market performance after a somewhat poor start on once again falling oil prices and disappointing US Q3/2015 corporate results. Market sentiment took a decidedly positive turn towards seeing the world more positive, when Mario Draghi appeared far more prepared to increase the monetary stimulus of the ECB (if required) than most had expected. European business sentiment figures were also up and thereby better than anticipated and suddenly the US earnings season appeared to turn much better as well. Tech companies Microsoft, Google, Amazon and Ebay all reported much better results than analysts had projected, which helped to push up markets further. By the end of the week the German stock market had regained 7%, while the UK and US were up around 2%. Most commentators saw the prospect of more '˜easy money' as the main reason for the market rally, however, we are not so sure that is entirely true. We can sense sentiment shifting up, because frequently over the last 2 months market participants have reacted far more cynically to stimulus news than they did this past week. To my mind it is the combination of better economic and company data together with monetary support assurances which might have brought about a bit of a change in outlook. Perhaps more institutional investors are coming to the conclusion that actually this economic expansion cycle is just a little lame at the moment, but there are more bright spots ahead than recently believed. As our set of graphs above for 2015 shows, industry standard investment portfolios of different risk levels should have translated the recent market calming into a recovery back above the 0% line - at least ours have. Sadly we are not yet back to where we were late April, but at least this past week felt as if market sentiment may possibly be getting back on track to take its leads from the real economy rather than just be buffeted by fears emanating from all those '˜what-if' scenarios which are bandied around. Before sounding too optimistic, various technical warnings signs have reappeared on the chart screens and so don't be overly surprised if markets don't immediately continue their upwards path between now and year end.