Optimism has returned to the markets led by better then expected economic data from China and corporate earnings from the US. Yesterday, equity markets more fully reflected the stronger corporate outlook which is an encouraging sign if the bullish trend from March is to resume. Today, corporate earnings will again be key with JP Morgan Chase, IBM and Google all due to report.
Yesterday economic data was generally better then expected and overnight Chinese Q2 GDP data provides further optimism that the global economic contraction is stabilisation. In the breakdown of China’s GDP data exports not surprisingly remain weak, but in a positive sign off the longer-term the flexibility of Chinese economy the Q2 growth was led by domestic demand fuelled by stimulus actions. This should start to end the notion that China is purely dependent on exports for its growth, as we have argued before; even before last year crisis, the majority of Chinese growth was driven by domestic demand.
In contrast, the FOMC minutes released yesterday demonstrates the split in the Fed over the future growth outlook in the US and according to which forecast you would like to use, from the regional fed members, growth in 2010 could stall or it could accelerate at its fastest pace in a decade. The range of unemployment forecasts for 2010 widened in June to 8.5% to 10.6%, versus a April forecast of 8% to 9.6%. On growth the lowest 2010 forecast indicates that economy stalling, growing by just 0.8% from Q4 2009 to Q4 2010, with the highest forecast looking at 4% growth in the same period. Overall, this is not good news and shows a rare level of uncertainty within the FOMC. Thus, the risk increases with the Fed not achieving a consensus that it stands still on policy for too long.
Sources: Reuters: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:
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