Risk appetite remains positive
Fawad Razaqzada March 12, 2018 10:30 AM
Investors’ appetite for risk improved in the latter parts of last week and the positively has continued at the start of this one.
Investors’ appetite for risk improved in the latter parts of last week and the positively has continued at the start of this one. At the time of this writing, European and US equity indices were trading higher, with the Nasdaq 100, which outperformed last week, hitting a fresh record high. The S&P 500, which closed just 3% away from its own record high set in January, looks like it may also print a new high at some point this week.
Sentiment improved last week as concerns eased over: (1) nuclear threats from North Korea, (2) the prospects of a trade war, (3) the possibility of sooner-than-expected tightening of monetary conditions in the Eurozone and Japan, and (4) the US economy.
All of a sudden there was unexpected urgency from North Korea to denuclearize and US President Donald Trump has agreed to meet the nation’s leader Kim Jong-un face-to-face by May. This sharply reduced the appeal of safe haven assets like gold and yen, boosting risk-sensitive assets across the board.
On top of this, both Mexico and Canada were spared from the harmful impact of the US tariffs on aluminium and steel imports – at least while they negotiate NAFTA terms. China and the European Opinion are among the economic regions that will pay the penalty for exporting these metals to the US. However, the US has allowed its allies to apply for exemptions and it would be a major surprise if the EU chose not to. Trump back-peddled a little after a number of Republicans voiced concerns he was alienating the nation’s closest international partners, who had threatened to retaliate. But there’s no guarantee that the EU will be granted an exemption. On the contrary, the EU and China could retaliate and this may trigger a so-called trade war.
For now, however, these concerns are not clearly evidenced in the wider stock markets. Granted, we are not totally out of the woods yet, and equity prices remain overstretched on historical basis, but there’s definitely fewer reasons for investors to fret over than at the start of last week.
Another reason for last week’s positively was when both the Bank of Japan and the European Central Bank delivered rate decisions that were deemed to be slightly more dovish than had been expected. The ECB revised downward its expectations about 2019 inflation, indicating that even when QE purchases end, interest rates will likely remain low. Recent economic pointers in the Eurozone have been soft, especially in Germany. If the euro weakens now, this should help support European export names.
The focus of the market will remain on the global economy after Friday’s release of US jobs data smashed expectations as employment grew by a solid 313 thousand, which was the strongest showing in 18 months. Average hourly earnings however grew only modestly, up 0.1% month-over-month. But this was excellent news for equities as it helped to keep the prospects of even quicker rate rises in check. Those expectations may have to be revised however if this week’s release of inflation data show that the tighter labour market conditions are boosting price levels.
In China, meanwhile, recent economic indicators have been mostly disappointing. So, the latest industrial production data on Wednesday better show a positive surprise, else Chinese demand worries could resurface and undermine risk appetite.
But overall, this week’s economic data releases are not as important as last week, with the exception of the US CPI and perhaps China’s industrial data.
So, at the start of this week, risk remains on the table. However, much of the positivity may already be priced in and there is the possibility for trade war concerns to resurface if the EU/China were to retaliate and introduce their own tariffs on imports of US goods and services. The possibility of a strong rise in US inflation or the prospects of poor Chinese data could also weigh on sentiment.
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