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Markets and macro insights with Bernard Swords, Chief Investment Officer
What happened in equity markets last week?
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Equity markets were up another 1.5% last week in local currency terms and performed somewhat more strongly in euro terms. Equity performance was more defensive. Healthcare, Consumer Staples, Utilities, and Property were all in-line with or ahead of the world index.
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The more striking feature of performance was the regional disparity. Last week, of the major regions, only the US was up, everywhere else was flat or down. This adds to the disparity we have seen since the US election in early November. The US market is up over 3% but the euro area is down 1.2% and Asia Pacific ex Japan is down 0.5%. The equity world is very much US centric and justifies our high exposure to US equities.
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Weakness in asset prices outside the US is not confined to equities. Currencies are also in the ‘firing line’. The last week was another bad one for the euro exchange rate. A poor Purchasing Managers Index (PMI) report and the threat of an escalation in the Ukrainian conflict brought the euro-US dollar exchange to a two-year low. Since the US election, the euro has dropped over 5% against the US dollar. It is difficult to see what will change this in the short-term.
What were the key takeaways from euro area PMIs?
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The euro area PMIs were released, and the results were very disappointing. The composite index fell back into contraction territory, dropping 1.9 points to 48.1. Both the Services and Manufacturing PMIs fell and are now in contraction. It had seemed that the euro area economy was beginning to stabilise, but this release throws any such assumption into doubt.
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The only solace is that the survey was after the US election and so fully reflected the impact of that event. Fears of tariffs on euro area exports are weighing on business sentiment but this could reverse quickly, depending on the precise policy direction of the new US administration. The general picture adds to pressure for the European Central Bank (ECB) to loosen policy further.
The week ahead: what to watch out for
It is Thanksgiving week in the US and so we will see a reduction in market activity. Attention will turn instead to the euro area’s inflation figures. Recent trends do not give grounds for confidence in this area. In the US, the major upcoming data point concerns consumer confidence and it will be instructive to see if the US Presidential election has had any impact.
