FRAGILE US IS STILL RELIANT ON STIMULUS

 
David Morris
CFD MARKET STRATEGIST, GFT

THE tension in the tug-of-war between equity bulls and bears cranked up a few notches last week. Initially, results from the second quarter earnings season boosted stocks since the majority of firms that have so far reported released better-than-expected numbers. But as the week drew to a close, doubts appeared to creep back in. We’re now in the final stretch of the earnings season, but it is the relentless waves of poor economic data that are influencing markets the most.

In the US, a positive take on the headline numbers for housing and unemployment claims managed to obscure the underlying softness in both key areas. But there was no hiding when it came to durable goods which, while notoriously volatile, were sharply lower than analysts’ estimates. On top of this, Friday saw advance GDP come in below expectations, sparking a sell-off across the board. This added to the uncertainty following warnings from the Federal Reserve itself. The Fed’s Beige Book noted that economic activity had been modest, and had actually slowed in Atlanta and Chicago. It also noted that the housing market remained sluggish and commercial and industrial real estate showed increased vacancy rates. There was evidence that the recent rise in manufacturing activity was flattening, as were retail sales.

All this suggests that investors are now looking ahead and perhaps concluding that what looked like a recovery is in danger of petering out quite rapidly. While some see this as a temporary hiccup in the recovery from a bog-standard cyclical recession, others see it as an aftershock of the crisis and a warning that the worst is yet to come.

If so, then it looks as if the world’s developed economies are simply too fragile to grow without government stimulus programmes. If this proves to be the case, then risk assets could get a boost on hopes of a second round of QE. But the danger this time is that the positive effects of further stimulus prove to be short-lived.