Rory Smith

Market Commentary

For the week ending 05 January 2018
Report by Rory Smith
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Rory Smith

Equity markets have started the year strongly, with both the FTSE 100 and the S&P 500 reaching new highs and the Nikkei 225 returning to levels last seen in 1991. A key catalyst for the continued momentum in equities from 2017 has been the release of Purchasing Managers’ Index surveys (PMI) for December which indicate that the pick-up in global activity continues to become increasingly synchronised.

Looking at the Purchasing Managers’ Index on a global basis, the JP Global Manufacturing PMI rose 0.4 and now stands at 54.5, and the services PMI rose 0.2 to 53.9 (a reading above 50 signals rising activity). Digging further into the readings provides support to the argument that activity should remain robust in the near-term – the New Orders Index, a leading indicator for future demand, rose further, pointing to a further pick up in manufacturing activity as we move through the first quarter. The employment index also edged up, which is consistent with strong job growth. Within the services PMI, there were encouraging advances in the readings in Europe, the UK, China and India. All in, the data caps a resilient final quarter of 2017 for the global economy.

Unsurprisingly, cyclical areas of the equity markets – such as energy and material stocks – responded well to the data, with oil and metal prices also advancing after China’s manufacturing PMI surprised to the upside. Technology stocks also outperformed broader markets, with the Nasdaq Composite rising by 2.5% in the first three trading days of 2018. The data also put some upward pressure on bond yields, and some weakness in the US Dollar, although the moves in both these markets was somewhat more muted.

Investors also continue to assess the impact of the US tax reform, which was passed by Congress in late December. The cut in the corporate tax rate will provide a one-off boost to US corporate earnings, helping to support elevated valuations in the US equity market. Whether this corporate tax cut and the reform of the tax treatment of overseas earnings will result in higher wage growth or increased capital expenditure remains to be seen, although some large blue chip companies have outlined plans to increase employee compensation. Consensus amongst economists is that the tax reform could provide a near-term 0.2 – 0.3% boost to US GDP, although the minutes from the Federal Reserve Meeting in December revealed some uncertainty about what impact the cuts will have on business investment and consumer spending. Longer term, if the reform works and boosts economic growth, interest rates are likely to rise further, putting pressure on bond markets.