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Waning market stimuli put stock markets on notice

A pleasant Easter break has been followed by new highs for US equity indices. And yet, it has been a less comfortable week for professional investors. The tailwinds blowing the 2019 stock market bounce-back are waning. Rebounding bond yields have made corporate borrowing a little less cheap than it was in Q1; oil prices – climbing on supply fears rather than demand pull – are creating a strain for economic activity; and an unexpected step up in the value of the US$ is equally concerning for emerging market $ borrowers, as it is for $ denominated global trade volumes. And the major central banks of China and Europe have been indicating no great inclination to loosen monetary conditions further.

 

Rising oil not a boon for global economy

When looking at the price of anything, it can be a problem working out whether a change is due to supply or demand. In the case of oil, this is especially so. Demand for oil is immense and highly linked to economic growth. When growth is strong, the price will go up even when the oil producers fully turn on the pumps. However, if growth is weak, the producers will try to manage the supply so that prices remain stronger than demand might indicate. Thus oil price rises can signal demand strength, or occasionally demand weakness.

 

China moving away from stimulus

This past week has seen several high-profile pronouncements from the Chinese government. On Friday, a Politburo statement indicated that Beijing believes the economy has now rebounded enough to not need further stimulus. This sentiment was echoed on Monday, when Xinhua news cited a top-level meeting chaired by President Xi Jinping as arguing for a balanced monetary policy, “neither too tight, nor too loose”.

 

The waning bite of the FAANGs?

The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have had enormous success in equity returns over the past decade. In the 10 years to tech’s peak at the end of June 2018, Netflix and Amazon surged 652% and 402%, respectively. Over the same time-frame, Facebook (+218%), Apple (161%) and Google (100%) have also far exceeded the broader S&P 500 index. But this spectacular growth story has looked vulnerable in the last year or so. Are the heady days of uninterrupted FAANG growth coming to their natural end?

 

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