The Investment Climate

The investment meme of a synchronized global upturn has been undermined by the recent string of US and European economic data. The flash March eurozone composite reading fell to 55.3, the lowest reading since January 2017. Although Q4 17 US GDP may be revised higher (toward 2.8% from 2.5%) mostly due to greater inventory accumulation, the curse of weak Q1 GDP appears to be showing its hand again, with forecasts now coming in below 2%. 

It may be easier for the Federal Reserve to look past the disappointing US data than the European Central Bank. The fiscal stimulus, which is larger than the 2009 effort, is likely to underwrite US growth in the coming quarters. US core PCE deflator is expected to have ticked up in March. For the past two years, the eurozone expansion has produced minimal price pressures.The two cycles, activity and prices, are not in sync. In the face of the loss of economic momentum, price pressures may be bolstered as the early Easter distorts. Preliminary March CPI will be reported in days ahead.  

The sharp equity loss and increased volatility seen in recent days are arguably more important than the high-frequency data in shaping the investment climate as the first quarter draws to a close. With the sharp drop in the US markets before the weekend and the poor close, the risk of gap lower opening in Asian markets is likely. Calendar considerations may discourage asset managers and other investors from viewing the pullback as a new buying opportunity quite yet. 

Testing chart-based support or technical retracement objectives may not be sufficient in themselves to provide a new low-risk opportunity. As we did last month, we suggest waiting for a reversal pattern, which is likely to be characterized by a recovery and strong close after new lows are recorded. At the same time, we note that ahead of the Q1 earnings reports, the largest buyers of US shares, corporations themselves, may also be sidelined.