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Waiting For the Rebound

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Tuesday, April 1, 2014

Stocks in Asia and Europe followed Monday’s strong performance from U.S. markets, with reassuring comments from the Fed Chairwoman doing all the trick. The mood is expected to carry over to today’s session as well, particularly at the open, with Chinese factory sector data helping lift sentiment as well. The manufacturing ISM survey coming out a little later will be key whether the trend carries through to the end of the day.

Janet Yellen appeared to be walking back from her ‘six months’ comment about the timeline for interest rate increases following the end of the bond purchase program. The Fed Chairwoman stated that the U.S. economy had enough slack that it needed continued Fed support through low interest rates. The Fed has been a key pillar of support for this market and the prospect of an earlier than previously expected pace of post-QE interest rates increases had unnerved the markets in recent days.

Economic data has been mixed at best lately. It is far from clear at this stage how quickly and to what extent the data will bounce back from the weather-induced slowdown of the last two months. The manufacturing ISM survey coming out a little later will give us some idea of what to expect in the coming days. The ISM index fell sharply in January, rebounded in February and today’s March reading is expected to show further improvement, though Monday’s Chicago PMI doesn’t bode well for today’s release.   

China’s official purchasing managers index for March came in better than expected, though the actual reading was barely up from the prior month. A competing private sector measure of activity created by the HSBC Bank was down from the month before and is now at its lowest level in 8 months. Sampling differences account for most of the divergence between the PMI measures, with the HSBC PMI reflecting more small and medium firms while the official PMI survey largely reflective of large state-owned enterprises.

The variance between the two measures this month notwithstanding, it is fairly obvious that the Chinese economy lost steam in the first quarter of the year and GDP growth will likely come short of the government target. This will keep alive hopes that Chinese authorities will loosen policy to give the economy a nudge.

The broad market indexes eked out modest gains in the first quarter of the year, but it was a tough period for stocks, particularly for some of the more high profile corners of the market. Many expect the rest of the year to be better, but I am not so optimistic. Stocks ran up last year in anticipation of a rebound in economic and corporate earnings fundamentals. But that hoped-for rebound keeps getting delayed.

Sheraz Mian
Director of Research


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