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FT features Stephen Pope and Spotlight Ideas

Wednesday November 20th 2013


Global Market Overview

Equities pause after recent gains

Tuesday 21.05 GMT.

Caution was the watchword in world stock markets as investors awaited further clues about when the Federal Reserve might start scaling back its economic stimulus measures and uncertainty mounted about the outlook for the global economy.

A general lack of fresh catalysts left Wall Street drifting following its recent strong performance, and the S&P 500 equity index closed 0.2 per cent lower at 1,787 – a day after it broke above the 1,800 level for the first time, only to stage a late retreat.

Some in the markets attributed Wall Street’s late sell-off on Monday to bearish comments from Carl Icahn, the activist investor – although several analysts noted the S&P had turned lower well before his remarks were reported.

But Mr Icahn’s view that US stocks could see a “big drop”, because earnings at many companies had been fuelled more by low borrowing costs than by management efforts to boost results, did generate some debate among market watchers.

“American corporations are far from being as simple and as shallow as Mr Icahn suggested yesterday,” said Stephen Pope at Spotlight Ideas. “They have booked great gains over the past two years, not by simply using cheap capital when it is available. The gains have built on innovation, good governance and rewarding investors with good dividends paid for by solid profitability.”

Analysts at BNP Paribas noted that US equity valuations were hovering around 2007 levels.

“According to Bloomberg data, the S&P 500 trailing price/earnings ratio of 17 times matches that of June 2007,” they said. “The forward p/e ratio at 16 times is also equivalent to 2007.

“While an interesting historical moment – and perhaps a warning – relative valuations for US equities versus bonds are still very attractive versus 2007 levels. Should the ‘lower yields for longer’ environment persist, there is every reason to believe that equity valuations can move higher yet.”

Meanwhile, there were some worries about the broader economic picture after the Organisation for Economic Co-operation and Development cut its forecasts for global growth this year and next, citing a slowdown in emerging markets and concerns over the US debt ceiling and the Federal Reserve “tapering” its asset purchases.

However, Andrew Kenningham at Capital Economics pointed out that as the OECD only published forecasts once every six months, the latest numbers were being compared to those published in May.

“As such they tell us nothing we did not already know,” he said. “The reduction since then is almost entirely due to the OECD catching up with the fact that growth in emerging economies has slowed.”

Fresh light could be shed on the prospects for the Fed’s asset purchase programme on Wednesday, when the minutes of its October policy meeting are published.

Investors will be looking for any hints that the US central bank might lower the target unemployment level at which it would consider raising interest rates.

US government bond prices slipped ahead of the release of the minutes, pushing the yield on the 10-year Treasury up 3 basis points at 2.71 per cent.

The Bund yield rose 3bp to 1.72 per cent after the German ZEW economic sentiment index rose to 54.6 in November from 52.8, the strongest reading since late 2009. Analysts suggested the recent improvement had been driven by the strong recent performance of the Xetra Dax stock index, which hit a record high on Monday.

The rise in US yields did little to help the dollar, which was down 0.2 per cent against a weighted basket of currencies.

The Australian dollar rose 0.5 per cent against its US counterpart following the release of the minutes of the Reserve Bank of Australia’s last policy meeting.

“Not for the first time, the RBA described the Aussie as ‘uncomfortably high’ and suggested that a weaker currency was still needed to support the rebalancing of the economy,” said Simon Smith, chief economist at FxPro.

“For now, it appears that markets are thinking the RBA is pretty powerless to push the currency down beyond the use of words.”

In commodities markets, copper rallied off a three-month low, ending just 0.1 per cent softer in London at $6,970 a tonne. Brent oil settled at $106.92 a barrel, down $1.55. Gold was up $1 at $1,275 an ounce. 


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