Buyers came back with a vengeance on Thursday. It was a complete one-eighty from Wednesday’s rout. The bounce-back attributed to White House economic advisor Larry Kudlow easing trade war fears has gained some traction. The DAX index hit a 2-week high while the FTSE 100 reached its highest in 3 weeks. In this volatile environment, there is still scope to blind-sided again by the next official comment or Tweet about US-China trade negotiations.
The two-day rally on low volume means there is no real conviction from investors. Short-covering meant it was the most beaten-up sectors, namely basic resources and technology that led the way higher.
On the FTSE 100, every sector was in the green but the outperformance of shares like Micro Focus International PLC ADR (NYSE:MFGP) with the worst one-month returns could mean the recovery is still on shaky ground. Some enthusiasm appeared for telecoms shares after the UK 5G auction. Insurers Aviva (LON:AV) and Direct line were the biggest drag, under pressure from the FCA issuing a warning on motorist renewal costs.
Unfortunately, if as we suspect, fears of a trade war blow over and investors turn their attention back to the economic fundamentals, they might not like what they see. The euro slid to its lowest in over a month after the service sector slowed for a second month, and by more than forecast. Thanks again to weather disruption (Beast from the East), UK services slowed to levels not seen since the aftermath of the EU referendum. But the deterioration goes beyond Europe. More advanced economies showed slowing activity in March than they did in February.
If anything, when the focus is on politics, then deteriorating fundamentals are positive for share prices via a weaker currency. The softer economic backdrop puts the onus on corporate earnings to drag markets out of their slump. US banks kick-off 1st quarter US earnings season next week.