So far this year, macro data has increasingly indicated global divergence, as central banks continue to follow the path of least resistance. Recent strength in the U.S. dollar as measured against the currencies of primary trading partners shows that the U.S. economy continues to look attractive relative to the other primary developed economies, placing European Central Bank, Bank of England and Bank of Japan policies in the spotlight. Meanwhile data supporting a maturing, more domestically oriented, economic cycle in China such as today’s purchasing managers’ index (PMI) releases and sluggish Brazilian growth has indicated a further decoupling of the fortunes of the major developing economies. As September trading gets underway, investors across the world are being challenged to think in global terms for reasons well beyond the geopolitical disruptions monopolizing headlines.
Battle of the bags: LVMH pulls out of Hermès bid. LVMH Moët Hennessy Louis Vuitton today announced plans to divest from Hermès International after a French court rulings against a possible hostile takeover. LVMH will distribute its 23 percent stake, valued at $7.5 billion, in the luxury brand known globally for its signature scarves and Birkin handbag, to institutional investors and shareholders. In 2010 LVMH disclosed a sudden acquisition of shares in Hermès through the exercise of derivatives contracts issued privately by dealer banks sparking a strong pushback from the target firm’s founding family and executives.
Bank of Canada to release rate decision. Today Bank of Canada governor Stephen Poloz is expected to stay the course with no shift in policy rates with the key overnight level remaining at 1 percent. Recent consumer inflation data remains near the central bank’s target level of 2 percent for the nation, with external demand factors remaining a focus of policy decisions.
Australia shows slight macro growth. Revised Australian second-quarter gross domestic product registered an advance of 0.5 percent over the previous three months and 3.1 percent year-over-year. While this represents a significant slowdown from the first quarter of 2014, it was stronger than economists’ consensus forecasts. In a speech after the release, Reserve Bank of Australia Governor Glenn Stevens reiterated his commitment to avoiding over-accommodative monetary policy despite unemployment levels that remain well above historical averages. Rapidly rising home prices and other gauges of structural inflation have been a focus of risk discussions in recent reports from Reserve Bank of Australia policy makers.
Service sector improves in China. Both of the closely followed nonmanufacturing Chinese PMI indexes released earlier today indicated healthy expansion in August. The official China Federation of Logistics and Purchasing (CFLP) measure advanced to 54.4 versus a prior 54.2. The corresponding HSBC index surged to 54.14 from 50 the previous month. While this bodes positive for overall economic activity, economists note that gains in employment in the service sector remain insufficient to offset pull backs in manufacturing at this stage of China’s economic development. The gap is narrowing, though: second-quarter GDP data puts services at 46.6 percent of total activity.
European service sector stumbles. Softer-than-forecast Markit non-manufacturing PMI data for the euro zone released today underscored ongoing concerns about overall activity in the region. The headline regional index registered a contraction at 48.3. Country-specific measures were mixed, with contractions in France and Italy. Spanish activity away from the factory floor rose significantly for the month. Nonmanufacturing activity in Germany, the euro zone’s largest economy, continued to expand with a reading of 53.7, a multimonth low that was below consensus forecasts. With a strong divergence of opinion among policymakers in individual EU member states, tomorrow’s ECB announcement will be fraught with political implications regardless of the decision. Separately, U.K. service sector activity rose in August at 60.5 versus a prior 59.1, beating consensus forecasts.
U.S. macro data on deck. Bureau of Economic Analysis (BEA) motor vehicle sales data for August and factory orders for July are both scheduled for release this morning with expectations for a significant expansion in the latter for the month, as durable goods orders continue to arrive at a brisk pace. The monthly Federal Reserve Beige Book is scheduled for release at 2 pm U.S. Eastern time, which will lend insight into the data guiding the Federal Market Open Committee’s policy formation.
Portfolio Perspective: Focus on the Message of the Market — Adam Grimes, Waverly Advisors
Last week we at Waverly Advisors laid out the highest-probability price path for stocks: for the rally which was then underway to fail into a downswing, but for that downswing to have limited expectation. That downswing was quite likely to mark excellent medium-term buying opportunities. This assessment was based on a read of the market structure at the time, momentum on multiple timeframes, and short-term sector flows as a proxy for sentiment. The correct way to visualize any price forecast is as an area of probability: visually, we might imagine a dark area on future charts mapping out this scenario, with fading lower probabilities areas above and below that most probable price path. Furthermore, as with any forecast, there is often valuable information in the ways that prices diverge from the forecast.
In this case, stocks were far stronger last week than expected. True, we can point to a number of supportive factors: geopolitical concerns generally have cooled: the situations in Gaza and in Ukraine have given headline watchers cause for some optimism. The situation in Iraq appears to be bleak, but that — not to be cynical — is also somewhat to be expected. Psychologically, markets can often deal with stress and concern surprisingly well, but market participants do not like surprises. There were also a number of constructive economic numbers, especially from the U.S. But we think that it is very important to avoid narrative fallacies; that is, the tendency to look at news items and say “This is why the market rallied (or declined).”
Over the long term, we still see strong support for an extended rally in equities. Manage the short-term appropriately — and, if you are a long-term investor, that may mean doing nothing at all — and simply focus on the message of the market.
Adam Grimes is the managing partner and CIO of Pittsford, NY–based research and asset management firm Waverly Advisors.
