Global
Equity markets were on a roll in March and investors were prepared for a downturn in April. In contrast to such expectations, global markets played from a different copybook. Equity markets continued to grow in April, albeit slowly. The main reasons for the steadiness of the markets were the good news coming from the first quarter earnings of companies, elevated commodity prices and the news of growing stability in the Chinese economy.
In America, many companies exceeded market expectations, helping sentiment on the stock exchanges. Higher oil prices helped energy related companies, while robust labor and housing markets gave rise to optimism about the immediate future.
These factors were in place in Europe too, where sentiments were boosted by the European Central Bank's (ECB) corporate bond purchase program. Stock values remained robust before giving up some of the gains on disappointing earnings results from some companies. In Italy, banking company stocks rallied noticeably, following an agreement to create a rescue fund aimed at stabilizing the financial sector. Further, the Italian government decided to reform its bankruptcy laws in conformity with European Union standards.
The present phase of a bull market began in 2009, according to some analysts. Despite some corrections in the interim, most notably in 2011, and 2015, the bull market has run on, seemingly carried by its own momentum. As night follows day, so too do bull runs end. The warning signals are all there. Some of the best companies' results were disappointing in the last couple of quarters. Quantitative easing and a weak USD are leading to an asset bubble, fed by artificial money. According to these analysts, the very high values of assets signal the final phase of the bull market.
"Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria"- Sir John Templeton. Going forward, investors would be well advised to heed this great value investor's homily. What's working for equity markets at the moment is that there are no signs of euphoria yet.
US
At the end of April, for the first time in five years, Nasdaq slipped into red for the fifth consecutive session. Benchmark stocks presented a mixed picture, pushed up on the one hand by rising oil prices and pulled down on the other by the Federal Reserve's decision to keep interest rates unchanged. Oil prices ticked up, even though oil inventories showed an increase. According to the US Energy Information Administration, crude oil stocks climbed to a high point of 540.6 million barrels as on 22 April.
April data for the labor markets were positive, while housing markets seem to have hit a minor block. The Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey, revealed that mortgage applications had dropped 4.1% for the week ended April 22, the National Association of Realtors (NAR) said that Pending Home Sales Index moved up 1.5%, the second straight increase on a monthly basis.
In its statement at the end of the policy making meeting, the Federal Open Market Committee, FOMC, stated that there would be "only gradual increases in the federal funds rate. The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data." However, the USD weakened on the hold decision by the Fed. (Finance.yahoo.com., April 28, 2016)
With April winding to a close, the Dow Jones Industrial Average (DJI) increased 0.3%, to close at 18,041.55. The S&P 500 rose 0.2% to close at 2,095.15. However, the tech-laden Nasdaq Composite Index closed at 4,863.14, losing 0.5%. The fear-gauge CBOE Volatility Index (VIX) decreased 1.4% to settle at 13.77. A total of around 7.4 billion shares were traded on Wednesday, 27th April, higher than the last 20-session average of 6.9 billion shares. Advancers outpaced declining stocks on the NYSE. For 68% stocks that advanced, 29% declined. (Finance.yahoo.com., April 28, 2016)
Europe
European growth prospects increasingly look to be on the down side. Growth is less than expected and inflation is nowhere near the ECB's target of 2%.Analysts feel that important structural reforms need to be pushed through. Weakening prospects for global economic growth is also weighing heavily on the Eurozone economy. Eurozone as a whole is expected to grow 1.8% this year, 0.1% less than previously forecast, while growth in 2017 is now expected to be 1.9% versus the 2.0% growth forecast earlier. Inflation in 2016 is likely to be 0.2%, down from 0.5% forecast earlier, while inflation in 2017 is projected to be 1.4%.
"The recovery in the euro area remains uneven, both between Member States and between the weakest and the strongest in society," EU Economic and Financial Affairs Commissioner Pierre Moscovici said. "That is unacceptable and requires determined action from governments, both individually and collectively." (RTT News May 3, 2016)
Stock markets ended April in red, pulled by lower than expected manufacturing growth in China, while a pessimistic sentiment amongst investors pushed down natural resource and mining stocks.
The Euro Stoxx 50 index of Eurozone blue chip stocks decreased 1.93 percent, while the Stoxx Europe 50 index, which includes some major U.K. companies, lost 1.60 percent. (RTT News May 3, 2016)
Asia
China
The economic situation in China continued to cause worry, in April. Today, China's bonds, currency and shares are all losing value. The bond markets found it hard to find a floor as both corporate and government bonds plunged. The five year sovereign yield posted a gain of 27 basis points. There are a growing number of bond defaults, which has prompted a major sell off of junk bonds. However, desperate speculation by traders, forced exchanges to cool the market. The Shanghai Composite Index dropped 2.2 percent in April, while the yuan fell 0.6 percent against the USD. This is in sharp contrast to the situation in the previous month, when stocks soared 12% and the yuan appreciated the most since 2010. The boom then was set off by a wave of new credit, part of the government's stimulus package.
The silver lining is the robust data from retail sales to industrial output. Similarly the commodities markets have witnessed a revival. The economy seems to have stabilized, though recovery is still fragile. Further, traders expect the yuan to depreciate against the USD, by as much as 6% by the end of 2016.Most analysts are agreed that the Chinese economy is at a tipping point.
"Clearly there was a turn in China," said Sean Taylor, chief investment officer for Asia Pacific for Deutsche Bank's wealth-management unit in Hong Kong. "You've seen money in the A-share market going to property and commodities. We've been adding risk in the last few months and coming into the summer, we will take it away and wait for opportunities to add again. We are not yet ready for China's structural story because earnings haven't come through." (Bloomberg April, 28, 2016)
Taylor expects the Chinese economy to grow 6% this year, well below the government's target of 6.5 - 7% growth. It is clear that investors are wary of putting their money in the second largest economy in the world. Earnings in the first quarter have been tepid. . Of the 171 Shanghai-listed companies that have reported three-month figures and are tracked by Bloomberg, 57 percent have missed analyst expectations. (Bloomberg April, 28, 2016)
(Bloomberg April, 28, 2016)
Japan
The earthquakes that struck Japan and devastated peoples' lives, adversely affected its economy too. The stock markets went into negative territory, pulled down by closure of several factories due to the earthquake. Expectations of help from the central bank were belied since the bank did not provide any further stimulus measures. This inaction by the Bank of Japan, in face of expectations of a further rate cut has pushed down global stock indices.
India
The Indian economy is a 'bright spot' in an otherwise gloomy world economy according to the IMF. Eight core sectors grew 6.4% in March, pushed by vibrant sales of fertilizers, refinery products and cement. Yet the country faces headwinds from the weak global situation. Poor overseas demand has reduced exports, while domestic industry continues see extra capacity. The Reserve Bank of India,, RBI, has tried to help things along by cutting interest rates 150 basis points in the last year to 6.5%.Interest rates have only been this low as long as five years ago.
Yet for many businessmen this is not nearly enough. They hanker for more and drastic cuts since there has been little pass through of the cuts into the wider economy. The problem is that the banks are caught in a vicious trap of loans made with poor judgments going bad. With bank balance sheets stretched, there is little prospect of offering loan restructuring except with government help. And the government seems to be reluctant to commit tax payers' money to bail out banks. Indian banks are using the central bank's accommodative stand and the reduction in interest rates as a cushion to tide over the bad times and earn as much as possible to shore up their balance sheets.
Nevertheless, with the economy is reasonable shape, foreign investors have thus far in the current year invested $1.6 billion in equities, while global funds poured $ 364 million in April alone in addition to the $4.1 billion already invested in the year.
"Metals makers and automakers are rallying on short-covering before the expiry," A. K. Prabhakar, head of research at IDBI Capital Capital Market Services Ltd., said. "Quarterly results of banks and automakers has been positive so far." (Bloomberg, April 26, 2016)
India's benchmark Sensex index fell 0.81%, or 207.27 points, to close at 25,229.70. The index fell for three out of four sessions. Since 27 April, the Sensex has fallen over 3.2%, or 830 points. So far this year, the Sensex is down 3.4%. (Livemint, May 3, 2016). However the Sensex rallied 1.3% at close to hit the 26000 mark again.
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