The divergence theme continues to play out with the release of the flash PMI reports for the major economies. China's manufacturing continues to be in contraction, now at a 11-month low1. On the other hand, both Europe and the US saw improvements, especially with Europe moving into positive territory2. The eurozone saw its first expansion since January 2012 for the private industry, according to the PMI flash estimates. The final data, to be released later this week, will likely confirm this trend: that China and the emerging world is slowing, while the developed world is growing.
Other fundamental data also points to a sustainable growth story for the developed world. In the US, the housing market continues to grow with new home sales rising to a five-year high3. Homebuilders are increasingly more confident, as seen from the Housing Market Index rising to levels not seen since 2006 (Figure 1). Home prices are likely to continue rising, given the solid momentum seen in sales and builders’ confidence, reinforcing the positive cycle. All these would probably more than offset the negative effect of rising mortgage rates4. We say 'probably' because the market is signaling some weakness for the moment. The HGX has been consolidating after a fantastic run (Figure 2). A more constructive technical picture would give us more confidence on the sustainability of the current housing market uptrend.
Friday’s employment reports are likely to drive market action for the next few months as a better report will cement the view that the Fed will begin tapering the bond purchase program. Judging by how little bonds have recovered from their May/June losses, it is highly probable that tapering will begin. The divergence in equity and bond performance will most likely begin as higher interest rates drive bond performance lower and better economic growth pushes stocks higher.
Having recovered from the bulk of last month’s losses, developed market equities are now overbought (Figure 3) and a period of consolidation is expected. We still see no signs to suggest that this is THE top for developed markets and continue to expect another leg up for markets like the US, Europe and Japan.
Figure 1: US Homebuilders’ Confidence Rising
Image courtesy of Stockcharts.com
Figure 2: Housing Equity Index Consolidating
Image courtesy of Stockcharts.com
Figure 3: Developed Markets Overbought
Further to our last report, we have already made recommendations for the rebalancing of all CPF portfolios to underweight emerging market equities in favour of developed market equities. Please refer to your advisers if you have any questions on this recommendation.
1. China July Flash HSBC PMI falls to 11-month low. 23 July 2013. Reuters.
2. Euro zone and US bounce back but China stalls, PMI data shows. 25 July 2013. Sydney Morning Herald.
3. U.S. New-Home Sales Surge 8.3%. 24 July 2013. WSJ.com.
4. U.S. Mortgage Rates for 30-Year Loans Rise to 2-Year High.
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