Thoughts on the Markets

So over the last couple of weeks the U.S has looked quite interesting. The UMCSI came in at 72 which was below the forecast of 73.5, housing starts came in at 760,000 above forecasts and building permits gave a figure of 755,000 which was down from the previous month (784,000) and also below the Bloomberg survey of 765,000. Other interesting stories was the close to 50% drop in earnings from Morgan Stanley which would probably lead to job cuts in the next quarter. Also the probability of QE happening this year has been significantly reduced due to the robust performance in the USD against the major and emerging economies in addition to the weakness in the 10 year treasury yield which is < 1.5%. Instinct also suggests that the yield isn't at record lows because the U.S economy is in good shape but because the rest of the world is not in the best of shape. Also quite recently the ratings agency Fitch gave a little reminder to the United States of their current rating and outlook which is AAA (Negative Watch) so maybe a possible downgrade not too far down the line. A cut by the ratings agencies doesn't necessarily mean that yields will go up. However last year this was the case with the S&P downgrade of the U.S. and the majority of the sell off in Equities markets came beforehand due to a slowdown in GDP growth. As GDP growth stabilised the market then rallied.

Also recently Moodys posted a negative outlook for Germany which was interesting possibly on the back of GREXIT fears.

In conclusion there are severe headwinds and the much discussed fiscal cliff is real due to the risk of severe GDP contraction in the U.S., political risk in not fixing the situation and the automatic spending cuts which come in from Dec 31st. We expect a market correction by a minimum of 10% due to these factors. However regardless of the situation this is a cyclical bull market

Thoughts on the Markets

Well it’s been an interesting week. The HSBC Flash China Manufacturing PMI came in at 48.1 for June down from 48.4 in the previous month. So the Official PMI, which is government backed and looks at the big corporations is in the expansion zone whilst the HSBC Flash PMI, a private sector survey of SME’s is in a contracting phase. Which number to believe? I know which number I trust. Indeed the US ISM came in below 50 at 49.7. That was a surprise to the market and the New Orders part of the survey also came in very disappointing. This is also the first time the ISM has come below 50 since July 2009 (34 months). Being a leading indicator it will be interesting to see what the number is for July. If it comes in below 50 again the that could signal a potential recession in the USA within 12-18 months and a market collapse as the ISM is a powerful leading indicator to the business cycle. Also the Non-Farm Payrolls number of 80,000 came in below expectations of 100,000. Private payrolls were worse at the 84,000 level which was below a consensus of 106,000. The Unemployment rate was at 8.2% which was in line with expectations. The US Market was looking to this number for confidence but due to missing expectations the market sold off. It’s still looking stable but that has been due to the out performance of the defensives sector in holding up the market.  The worst news is that the number doesn’t look that bad to warrant more QE. So in conclusion there looks to be a global slowdown in manufacturing which doesn’t look positive for the global economy. On a final note the last time a Britain was in a Wimbledon Final (which was 74 years ago) we were in a global depression. Now that is something to think about!