Markets re-found their footing this week with European stock markets hitting a three month high.
- The FTSE 100 is up around 7% over the past month
- Many of the problems that have troubled markets still remain
- Key has been a softening of tone from the Federal Reserve
In many ways, it is difficult to see what has changed. The global economy appears to be on a similarly precarious footing: Germany has narrowly avoided recession, while the UK economy has stalled and no-one really knows what is going on in the US because the government shut-down means that there is no data being put out. Donald Trump has extended the trade talks with China, but it is difficult to see how progress can be made to address such as vast, intractable problem.
However, there are a number of things that have changed the market mood. First, and most important, appears to be a softening of tone from the Federal Reserve. Aware that it has a responsibility to look at global economic data rather than just US data, Federal Reserve Chair Jerome Powell indicated that monetary policy was on hold as the committee assessed the economic conditions. Rising US rates have been painful across the world, particularly in some emerging markets and any pause in monetary tightening is welcome.
There has also been a subtle change in the China outlook. At the end of last year, manufacturing was weakening and it looked as if trade wars were hurting growth. While GDP hadn’t shown a meaningful downturn, few believe the GDP numbers. But then, surprisingly, trade data showed a strong bounce - China's January dollar-denominated exports rose 9.1% year on year, against expectations of a 3.2% contraction. The country’s trade surplus also beat expectations and left it in a stronger position to deal with some of its more intractable debt problems.
These are important shifts. Add together stimulus measures from China, Europe and Japan and they more than outweigh the withdrawal of stimulus from the US. Tighter monetary conditions have been a key factor weighing on financial markets. If conditions stabilise, it removes a significant headwind to markets. At the same time, it is not as if the bull market was particularly well-loved. Although it had been going on a long time, it was fairly shallow. After the recent sell-off, valuations didn’t look ambitious.
There may be less upside in this bull market, but it appears it can limp on a little further.