Friday, 27 April 2012

Week in review: The race for the Premiership(s) intensifies…

It was 2003 when Sir Alex Ferguson coined the phrase “squeaky-bum time” to describe the end of the football season when every game assumes a greater importance. Back then though he couldn’t have anticipated Monday’s Manchester derby between the UK’s highest flying clubs. But the fixtures list has an uncanny knack of building tension in the race for the footballing Premiership.

Surprisingly, the European political calendar seems keen to build a bit of excitement of its own. The definitive round of France’s Presidential elections falls on the same day as Greece chooses a new parliament – Sunday 6 May.

Political tensions weighed on equities at the start of the week as France’s François Hollande produced a narrow socialist victory in the first round of the French elections but, as that had been expected, it was probably more Holland than Hollande that troubled the markets. The collapse of the Dutch coalition following the Freedom Party’s withdrawal of support has raised an important question regarding the functioning of the fiscal pact and the role of the ECB. Agreeing upon fiscal rules in the conference rooms of Brussels or Frankfurt may be difficult enough, but passing the resulting finance bills in national parliaments might actually be impossible. 

All of which has helpfully re-highlighted the lack of growth in the Growth & Stability Pact (known waggishly by some as the Suicide Pact) that makes it only slightly more bemusing than the UK’s hosepipe ban during what seems set to be the wettest April on record.

If policymakers hoped that a resurgence in economic data would pull Europe out of the mire they were disappointed on Tuesday. Purchasing managers index surveys (PMIs) implied both services and manufacturing sectors were contracting faster than thought. In a familiar tale, German services retained some buoyancy but the sectors French equivalent unfortunately soured the tone. 

European survey data continues to disappoint…
 Source: Markit/Brewin Dolphin

Wednesday’s release of UK GDP figures announced a slide back into recession with a second consecutive quarter of economic shrinkage – 0.2% after last quarter’s 0.3% decline. How long this recession will last is a hotly debated topic. Indeed it may cease to exist altogether as this advance number is routinely revised. Recent years though have tended to see it revised down more often than up and some optimistic-looking estimates of construction activity in March within the advance figure suggest, that the same may be true again this year.

House prices remained mixed in the US but data continues to suggest that gains are likely with home sales picking up substantially.

As anticipated Mitt Romney won the race to be the Republican’s least-worst candidate. Burdened as he is by his reputation for policy flip-flopping, his Mormonism and his sub-15% income tax rate, it remains to be seen whether the conclusion of the race for the nominee can boost his head-to-head polling against Obama. Nevertheless, the nature of the competitors means that the election campaign should be fought over the centre-ground of the economy rather than the distraction of social issues.

A line of attack the Obama campaign is sure to take will centre on Romney as a pawn of big business and Wall Street. Indeed, for all the tentative signs of recovery for “ordinary households”, corporate America continues to boom. Halfway through the first quarter earnings season twice as many companies are beating analysts forecasts as are missing them, and revenues as well as profits are growing – Apple being the highest profile example. 

S&P 500 company earnings and revenues continue to impress...
Source: Bloomberg
Such strong corporate results helped investors climb the wall of worry built by Europe’s ongoing crises of philosophy, politics and economics. Leaving the only potential hurdle as today’s advance estimate of 1st quarter GDP. The headline number was slightly disappointing but modest rises in prices and employment costs offered reassurance that the Federal Reserve stand to support the economy as the year progresses.

After all that investors are now left looking forward to another busy week with US survey data, UK house prices, and the all-important US employment news next Friday where we would have to fear downward revisions to previous months (based upon the revisions already seen to unemployment claims). More than half an eye though will be on the double election on the following Sunday, the results of which are sure to move the market Monday morning.

But before that relax and enjoy the Manchester derby…

Guy Foster
Head of Portfolio Strategy


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