When looking at the broader market indices ytd with SPX up 2% and Eurostoxx flat, it may seem the market is just treading merrily along its way. However, underneath the surface, it tells a different story with alot of stock and sub sector rotation appearing. As mentioned previously 2014 will be all about stock selection than playing the broader market momentum.
We are now past q4’13 earnings reports, what have we learnt?
A poor EU earnings season has led to continuous downgrades in the earnings growth outlook. The bottom up consensus earnings growth for 2014 calls for 11.3% growth vs. 14% just few weeks ago; alot is concentrated in 2H14. 35% of EU firms beat on top line while in the US q4’13 revenue beats were encouraging at 64%. EU sales should pick up as it lages confidence by six months but rising US credit growth may lead S&P to outperform SX5E in 1H’14. Despite this trend, according to the latest Merrill Lynch Global Fund Manager survey released on 22nd Feb’14, PM’s are “all in” on Europe on hopes of earnings rising into a recovery.
Currently, the market is fixated on the Ukraine crisis and analysts are busy publishing various upside/downside scenarios across all asset classes. But let’s not get distracted by these headlines, as we get deeper into q1, the macro economic data is showing further signs of softening in China, US and EU that puts the “recovery” or “cyclical” trade at risk.
According to GS February Final Global Leading Indicator (GLI) proprietary model, the global industrial cycle in the ‘Slowdown’ phase, with positive but decreasing Momentum. There have been some recent weather related data distortions in the US, which will begin to roll off in the near future. But can we be sure it’s all weather related? US q1 GDP is annualizing around 2.5% vs. expectations of 3.5%. Data reported in the next month should give new signals about the true state of the economy. One thing is for certain, the soft data has not veered the Fed off its tapering path. The data has to get a lot worse for the Fed to alter its policy. Unfortunately, q1 is facing weak data combined with liquidity being drained from the system; double whammy for risky assets.
Let’s take a look at what is happening in some commodity markets outside of the broader headlines dominating most sell side calls these days. For the past few months I have discussed the state of physical commodity markets with surpluses building up in Iron Ore, Steel and Copper. These markets have been behaving rationally for most of the year and been on a firm downtrend vs. their respective Equities, that had been rerating ignoring near term fundamentals, treating this weakness as a minor speed bump in a longer recovery, causing a big disconnect. Are the Chinese corporate bond defaults, weaker import/export Chinese commodity data, and softer economic data prints out of US and EU finally giving investors the reality check they needed?
The truth is nothing has changed in the last few weeks, just the pace of selling has picked up. Ofcourse the market always needs a scapegoat to blame for the “adjustment”, but let’s call a spade a spade, commodity markets have been loyal to their bearish fans and continued on their downward path in line with fundamentals.
