It is said that, in a world awash with money as a result of quantitative easing and fiscal laxity, investors have to buy equities because ‘There Is No Alternative’. Every so often along the way, however, even the most gung-ho investor must stop and think. That happened at the end of last week.
One of the triggers was airlines: British Airways will reduce headcount by 12k and Berkshire Hathaway has sold all of its shares in US airlines. A far bigger worry was raised by the US president who, in his keenness to deflect criticism about the tragic Coronavirus pandemic, hinted that he may punish China by “just putting on tariffs”. It proved difficult to find an investor who agreed that escalating the trade war would be a terrific idea in the middle of a deep global recession.
As share prices moved lower on Thursday and Friday the safe-haven currencies found renewed demand. The Swiss franc was Thursday’s top performer and the Japanese yen took the lead on Friday with the franc and US dollar sharing second place. In the back half of the field sterling beat only the Northern Scandinavian crowns and the antipodean dollars.
A pattern emerges
The May Day bank holiday in Europe messed up the normal symmetry of purchasing managers’ index announcements. Those which did appear, from Britain and the United States, were mostly as soggy as forecast. The all told roughly the same story.
UK manufacturers reported output, orders and employment falling “at record rates” in April, taking the manufacturing PMI down to a record low of 32.6. At 36.1 the US manufacturing PMI was only an 11-year low, though it did represent “an unprecedented contraction in production”. Canada’s 33.0 represented “by far the steepest downturn” in the survey’s 10-year history. The ISM’s 41.5 reading for the States was one of only two on Friday to come in above 40, the other was Japan’s 41.9, another 11-year low. The rot continued this morning in the Far East with the Philippines at 31.6, Malaysia at 31.3, India at 27.4 and Kazakhstan at 39.3. In one respect or another all of them were in some way the worst ever.
The UK housing ecostats on Friday were mixed. Lending data from the Bank of England showed a sharper than expected slowdown in mortgage approvals: 56k in March down from 74k in February. Nationwide’s house price index edged up to a 3.7% annual increase, the strongest since February 2017. Nationwide’s economist speculated that “the raft of policies adopted to support the economy… should also help ensure the impact on the housing market will ultimately be much less than would normally be associated with an economic shock of this magnitude.”
Europe will play catch-up with the manufacturing PMIs today. Other than euro zone investor confidence and US factory orders there are not many other ecostats in today’s agenda. The Reserve Bank of Australia is expected to leave monetary policy unchanged tonight.
Ahead of London’s opening Australia reported a 4% monthly fall in building permits and the manufacturing PMIs from Sweden and Spain came in at 36.7 and 30.8. An improvement is expected in the Sentix index of Euroland investor confidence, on the back of the rebound in equity prices. The US Census Bureau is likely to report a sharp fall in factory orders.
Tonight the Australian services PMI for April could well come in below 20. With the Cash Rate at 0.25%, just about as far down as it can go, the Reserve Bank of Australia board will not have much to talk about when it meets tonight. It will have to say something in its statement though; perhaps with regard to how long it expects the Cash Rate to remain unchanged.