Current financial market signals- October 2018

Set out below is the latest colourful dashboard updated on 11 October 2018 from one of our research partners, Ineichen Research & Management (IR&M).

 

Observations
In the IR&M dashboard, green is good, red is bad. Markets respond mostly to change. Changes vs last update are circled.

The key take outs from this month are:

  • Overall changes in this update were negative. No surprises here. Over the past five updates the positive-negative change ratio was 26:43. From 63 regime tests in this update, 64% were positive.
  • Economic momentum is mostly negative, especially in Europe. The US economy remains very strong and is the exception.
  • Earnings momentum remains mostly positive. However, the changes are negatively biased implying earnings peak has past.
  • Risk: CPI and PPI remain rising with the VIX (volatility index) >20.
  • Notables this month include- UK economic health check same as in October 2007 and equity-bond correlation to remain high on the way down.

 

Table 1

 

 

A refresh on the columns
Looking at each of the factors, broadly from left to right, the first five columns set out IR&M’s interpretation of various recent economic data released in those counties and whether it is generally improving or deteriorating. The EPS change column in the middle is a very important indicator of whether profits estimates for the next year are rising or falling. The final three columns look at the momentum (or technicals) in the various global share markets.

 

Are there any Risks?

Over the month the sum of ticks has fallen. Key changes include:

The Positives- long term price momentum of US financials have improved, similarly, long term earnings momentum in German financials has improved. Chinese economic momentum is rising.

The Negatives- the UK had a double whammy with the long-term momentum of the FTSE turning negative and the long term momentum of the 10-yr yield is rising.
The US 3 month PMI moving average has stalled and lastly, Japanese year on year production has figure has dropped below 2%.

 

September 2018 bottom line tally:

 

 

What about Australia?
According to Ineichen’s data, in Australia, economic momentum remains negative, however long term price momentum remains mostly positive for the majority of the index except for Financials and Resources.

In this month’s update Ineichen’s highlighted that business conditions and confidence levels imply lower future returns for risky assets.

 

Table 2

 

 

 

Source: Ineichen Research & Management
IR&M is one of several research sources that guide our investment decision making. They are Swiss based and provide a detailed global view of the many drivers of investment markets. Like us, they believe that in the long run investment returns are driven by the fundamentals (the prices today will ultimately revert to what various things fundamentally ought to be worth) but in the short term may be driven more by sentiment and momentum (otherwise known as “technical” signals).

 

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