After a sizable rebound for the major global indices (bar China and Hong Kong), the days of the recovery could be numbered. Worries over stagflation, China’s ailing economy and more rate increases, as well as disappointing US tech earnings, all could come back to haunt investors.
- US tech earnings in focus
- Recession concerns intensify
- Chinese stock market on its knees
- How will EU stocks react to ECB decision?
US tech earnings in focus
The disappointing earnings results from Alphabet, Microsoft and Texas Instruments could be a sign of things to come. There will be plenty oof more US tech earnings to come this week, including Facebook parent Meta, today, as well as Apple and Amazon tomorrow. So, be prepared to hear more about how the strong dollar and high inflation is hurting US sales abroad. As such, there is a risk that the rebound in indices could unravel. At best, we could see only a modest further recovery in the event of a few earnings beats. But do remember that the bar is set quite low already. The devil will be in the detail. Any short-term spikes in stock prices as a result of a beat or two could get sold into, if the earnings are accompanied by warnings about sales.
Recession concerns intensify
Global recessionary signals are continuing to pour in. This week’s macro data from around the world have been quite poor.
The Eurozone economy is on its knees, despite the recent drop in some energy prices. Data released so far this week have not bucked that trend, with the latest PMI data being particularly concerning. Disappointing data underscore the challenges the ECB faces at a time when inflation remains very high. With the global economy slowing, and central banks having to tighten their belts further, it is difficult to see how stock markets would thrive in this sort of environment, after this year’s mostly weakening asset prices.
Although the US economy has weathered the global stagflation storm slightly better than some of the other regions of the world, even here, cracks are starting to appear. The manufacturing PMI plunged into contraction in early October, while the services PMI also fell deeper below 50.0, as new orders were the weakest since Covid lockdowns. Additionally, the Richmond Manufacturing Index plunged to -10, while the CB Consumer Confidence slumped to 102.5 from 107.8 previously.
Chinese stock market on its knees
Worries over China, the world’s second largest economy, continues to grow and this has been reflected in a slumping equity market there. Have a look at the China A50 index:
China is struggling to restore confidence among investors. On Sunday, Xi Jinping, China’s president, secured a third term in office and stacked the country’s highest decision-making body with loyalists. This followed the conclusion of China's 20th National Party Congress, where leaders who will set the country's economic and political policies for the next five years were announced.
Xi’s zero-covid policy is what has hurt the economy so dearly in recent times. While the rest of the world have moved on or learned to live with the virus, China is continuing to take no chances. Investors are worried that as a result of further, inevitable, flare ups of the virus, more lockdowns will be announced, causing even more pain for the people and economy.
Investors are also worried that because of Xi’s loyalists being concentrated at the top of the decision-making body, there is the potential for more policy mistakes that could cause severe damage to the future path of growth. Xi will have a lot more say in how future policies will shape.
How will EU stocks react to ECB decision?
The ECB will once again have to turn a blind eye on yet more recessionary signals in the Eurozone, China and elsewhere as it battles to bring inflation back under control and stop inflation expectations from rising materially. A 75-basis point rate hike appears to be a foregone conclusion, which means the reaction of the euro and European stocks will depend on more than just the rate decision itself.
With a 75-basis point hike being fully priced in, the DAX and other EU indices will need the ECB to provide a dovish surprise to send it significantly higher from here. But this is unlikely. The region’s major indices are unlikely to find significant support from the ECB, as investors’ focus remains fixated on stagflation signs and global central bank tightening.HERE is a technical outlook on the German DAX index I posted earlier.
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