This week, though, we will get to see if equity markets and economic reality are more closely interconnected. However, price action today hasn’t really shown us that is the case.
China started the ball rolling with some disappointing trade numbers. Put in USD terms, March imports fell 12.7%, above the street’s view of a 10% decline. Clearly the level of demand in Q1 has not changed substantially despite input prices becoming much cheaper (as a result of being more abundant).
Exports fell 15% in USD terms relative to expectations of 9% growth. As a result we saw an absolute collapse in the trade balance to $3.08 billion and it must put the risks for this Wednesday’s Q1 GDP to the downside. It should have ramifications on the RMB and the potential for short-term weakness is strong.
The World Bank cutting its 2015 China GDP forecast ten basis points to 7.1% is not a reason to be overly concerned. However, comments that the outlook for developing east Asia and the Pacific regions are subject to ‘significant risks’ is portably more so, although no one has expressed any major concern in the markets.
China’s Q1 GDP in focus this week
The market is looking for China’s Q1 GDP to be closer towards the 7% handle and this seems about right, but the way the bears initially slaughtered the AUD suggested a below read 7% seems more likely. Some selling was seen initially in the mainland markets, although Hong Kong stocks have held in firmly and are even building on last week’s near-10% rally.
The ASX 200 once again tested the 6000 level and once again looks set to close below the prior day’s low. This ceiling is rock solid and it really will tell a clear picture if we can get a weekly close above this level, but the fate of this will be determined by offshore leads and will likely materialise as a function of a higher open. Still, we have seen a cautious market and we are going to need to see Europe and the US push higher for a break of 6000 to occur.
The fact that the US, US and European markets are at multi-year or all-time highs is bullish and I believe should be traded as such, especially when the VIX is at 12.58% and highlighting a real lack of concern about the macro environment.
There are still many question marks around US growth, so the March retail sales will be interesting this week. A snap back of 1% is expected, so there are good numbers here. Along with manufacturing and housing data, I think this should get the USD bulls going, especially after last week’s jobless claims and JOLTS report.
I don’t think public narrative from Federal Reserve speakers is overly important at this point as we need to see a run in data to find out if it has altered these presidents’ views in any great capacity. I think the point to watch comes in a month’s time after we have seen some of the Q2 data points and we head into the June FOMC meeting.
US earnings need to be upbeat
One should listen, however, to the leaders of the corporate world – 15% of the S&P 500 come out with quarterly earnings this week, including 40% of the financial sector. How CEOs see interest rates, the USD, economics and oil – and how these variables are affecting their business – will be of importance, and this guidance will play a key role in price action.
We are also left in the interesting position of earnings estimates having been lowered some 8% in the last few months, with investors staring at the first quarter of negative earnings growth since 2009. Clearly the bar has been lowered somewhat, but with the S&P 500 trading on 17.8 times forward (consensus) earnings, we will need to be significantly above consensus in some cases. Markets are priced to perfection so investors will need to hear something compelling for new money to be put to work.
Of course the most likely outcome is for EPS growth to massaged by more official means, such as buy backs, as well as dividend increases. However, it would be reassuring to hear corporates talk about potential better economic times ahead.