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Tech earnings season and “old” data to the rescue

Global equity markets were up by roughly 3-4% on the week with technology stocks leading the way. Year-to-date stocks are up roughly 2-3%.

In general, the less effected any stock market is by China the better it has performed and this makes sense. The global economy looks like it is turning up and now the question is by how much things like the coronavirus and potential volatility around the US election process can derail that upswing

US manufacturing data held strong

Data on the economy was strong this week but all economic surveys relate to time periods before any trouble had emerged from China on the virus. Hence the phrase “old” data. One particularly strong number was the US ISM manufacturing index, which came in well ahead of expectations.

If the extraordinary measures China has taken to limit the spread of the coronavirus remain in place as expected, then weaker economic numbers coming out of China and elsewhere should worsen over the next six weeks. Investors may see this start to happen as soon as the end of February with the flash PMIs released before the end of the month. Yet it is not inconceivable that Chinese PMIs for March, published in early April, actually show that things are starting to improve. However, when the bad numbers start coming out they should invariably unsettle markets so it will be interesting to see how investors respond.

Bank of China takes action

As a positive take-away, it is notable that the spread of the virus appears to be abating. As of last Friday morning (UK time), the daily rate of change in infections was an increase of 26%; this morning the same number was 11%. Also of note is the action of the People’s Bank of China on Monday, which took the first concrete measures in response to the virus by cutting 7-day and 14-day reverse repo rates by 10 basis points.

Whilst the world is not out of the woods yet with regard to coronavirus, if the spread of the virus can be contained over the next few weeks it might become old news, at least with respect to any lingering negative effects on stock markets.

Positive news for tech stocks

Another positive was the earnings season and in particular the tech sector in the US. With the top five stocks (all tech stocks) in the US now making up 18% of the US stock market by value, the earnings season can be influenced heavily by how these companies report. Four of the top five companies beat analyst expectations with only one – Alphabet (the parent company of Google) – missing so this has helped equities over the past ten days.

© 2019 GWM