The poor results of the expected jobs report last Friday (18K vs 105K consensus) were another reminder of the ongoing slowdown in the global economy. Despite the large surprise, the market reaction should be seen as positive. After opening down 1.4% upon the announcement of the dismal employment report, the S&P 500 climbed 0.76% to pare the day's losses to 0.7%. The same trend occurred in other risk assets like emerging market equities, commodities and high-yield bonds.
According to the PMI reports, the global economic slowdown remains in progress. Given the positive trend in risk assets over the past two weeks, markets are likely to have discounted the end of the slow-down.
Figure 1: Global PMI Indexes
Despite the deal that Greece struck with the EU and the IMF, the risk of greater trouble remains, especially if a recession were to strike Europe. The relative performance of European financials (which hold a good proportion of PIIGS bonds) as compared with the broader European equity market, is continuing on a downward trend. Investors continue to discount an outcome that is likely to be worse than now.
Figure 2: European Financials
At this point of time, we do not expect a recession. There are signs that the economic slowdown is coming to an end; however, it is hard to predict how strong future growth will be. Nonetheless, coming out of the market trough on June 16, we see cyclical sectors outperforming the other sectors. The important consumer discretionary sector is up 9.49%, while the consumer staples rose only by 3.26%, versus the market's 6.19% rise. The fact that the consumer discretionary sector made new highs lend credence to the idea that the current rally still has legs.
Figure 3: Consumer discretionary index
Still we would take advantage of any new high in markets to lighten exposure in risk assets. The economic expansion is beginning to wear thin - margins are lower and financing for the least credit-worthy companies have gotten tighter. It is now time to exercise restraint when investing.
IMPORTANT NOTES: This report is provided for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed to any other person without the prior written consent of GYC. The information and opinions expressed herein reflect a judgment of the markets at its original date of publication and are subject to change without notice. GYC does not warrant the accuracy, adequacy or completeness of the information herein and expressly disclaims liability for any errors or omissions. The information is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. Neither is past performance necessarily indicative of future performance. You should make your own assessment of the relevance, accuracy and adequacy of the information contained in the information provided and make such independent investigations as you may consider necessary or appropriate. Accordingly, neither GYC nor any of our directors, employees or Representatives can accept any liability whatsoever for any loss, whether direct or indirect, or consequential loss, that may arise from the use of information or opinions provided.
GYC FINANCIAL ADVISORY PTE LTD 1 Raffles Place #15-01 One Raffles Place, Singapore 048616
Tel: (65) 6349-1441 | Fax: (65) 6349-1440 | Email: firstname.lastname@example.org | Co Reg: 199806191-K