China data sees Easter come early for investors, while Germany is our one to watch
Are investors too bearish for the state of the global economy? This is the key question for investors as we head into the Easter weekend. This week has given us the most important pieces of information that could drive asset prices for the rest of the second quarter. Firstly, Chinese economic data, and secondly, US bank sector earnings.
China offers beacon of light for bulls
The Chinese economic data was a welcome announcement for the bulls on Wednesday. China’s National Bureau of Statistics estimated that China’s economy grew 6.4% in the first quarter of this year, beating expectations of 6.3%. This is fantastic news for the following reasons: firstly, the higher than expected growth rate comes on the back of some lacklustre growth figures elsewhere, I’m looking at you, Berlin, so at least we have the Asian powerhouse to keep the global economy buoyant. Secondly, Wednesday’s figure was for Q1, back when the US and China’s trade war was still at its peak. As we move into Q2, the market is expecting a neat resolution to the US-China trade war, which is likely to happen in the coming months. So, Chinese growth managed to beat expectations even though trade relations with the US were far from ideal, investors are now imagining how good growth will be once the trades relationship with the US is restored.
The only way is up, for the Chinese powerhouse
If Q1 is the low point in China’s economic cycle, then the glow that this data may cast on financial markets could last for some time. Oil surged to its highest level of 2019 after the release of the Chinese data, this is good news for big oil stocks including BP, Shell and Exxon. BP’s share priced jumped on Wednesday and the share price remains close to its highest level since October 2018. Industrial production and investment helped to boost the GDP figures, which might limit some people’s enthusiasm as it suggests that China’s economy is still export-focussed, which could antagonise the US as the trade negotiations reach a critical phase; however, this is not the market’s focus right now.
Why we are interested in Germany
When China is doing well, people naturally look at the economies closely aligned with Chinese economic prospects. While Australia is worth watching, we believe that Germany could see the biggest move from better economic prospects for China for the rest of this year. In fact, the Dax has seen a big improvement in the past month, with some big hitters including Daimler, VW, Adidas and BASF all seeing gains this week. The German 10-year yield has also moved out of negative territory, which is another sign that money could be moving out of the bond market and into stocks. The knock-on effect has been felt in the FX market, with EUR/USD rising above $1.12, if German yields can continue to push further into positive territory then we may see more gains for the euro, particularly vs. the USD. Wednesday’s announcement from the German government that it has slashed its growth forecast for 2019 should also be seen as a positive omen for German growth prospects – the only way is up from here!
Bank stocks could be the pick of Q2
US earnings season is also positive for traders. Although stock markets were fairly lacklustre on Wednesday, growth focussed stocks did well. US earnings season was a mixed bag, with the banking sector particularly difficult to read. However, some of the banks who under-performed market expectations, including Goldman Sachs and Morgan Stanley, suffered from lacklustre investment banking performances. However, if the global economy picks up, and stocks markets are about to engage in another leg higher, as we expect, then banking revenues, especially for these investment-focused banks, should also pick up. We believe that any weakness in Goldman and Morgan Stanley stock prices could be attractive to traders, and we expect this week could be the low for banking stocks both sides of the Atlantic.
Economic data watch: European PMI’s
The next focus for investors’ will be Eurozone PMI’s on Thursday. We believe that a strong data set from Europe could trigger stocks to rally into the weekend. Although there are growth hurdles for the global economy, we believe that the positive aspects of global economic data may help to drive stocks higher in the coming weeks.
Why stocks are more interesting than currencies right now
Currency volatility continues its slumber as we move into a new era where the Fed are likely to remain on hold, the ECB is threatening more stimulus and the BOE is held hostage to the Brexit negotiations. Although we believe that it is time for the dollar to take a back seat, we don’t see major moves in global currencies for the medium-term. The move back above $1.30 in GBP/USD was encouraging for GBP bulls, and we may see this pair grind higher in the coming weeks, although European elections remain a political risk that could limit any upside, hence the dip in sterling on Wednesday when the latest political polls suggested a slump in support for the ruling Tory Party. We also remain positive about the euro’s prospects, as we mentioned above. However, the lack of volatility in FX is why we are more excited by stock markets, both individual companies and indices, as we look forward to the Easter weekend. To all of those celebrating, a very happy Easter to you.