- The NASDAQ:VXUS ETF in the developed world ex-US is up 5.7% this week.
- The US S&P 500 is up 5.8% this week
- Do major international gatherings reflect an improving economic outlook or a brief reprieve from the pain to come?
Recent Price Action
In unison, international stock markets rallied on very little positive news. The Australian RBA has moderated interest rate hikes, but continues to increase them.
OPEC is threatening to cut production, reversing the deflationary work of the US Department of Energy (DOE).
US and European manufacturing is slowing or even contracting. Still, international stocks are up more than 5% to start the week.
This week, a slew of manufacturing data released around the world provides a window into the outlook for productivity.
The Purchasing Managers’ Index (PMI) is considered a leading indicator of the state of the economy. A reading above 50 implies the economy is expanding, and below 50 it is contracting.
A wide range of European countries, as well as the United States and the United Kingdom, have experienced a retracement in the level of expansion and, in the case of Europe, a long period of economic contraction.
The monthly US manufacturing index:
In Europe, the picture is darker with the deterioration of economic conditions. The European S&P Global Manufacturing PMI for September posted a reading of 48.4.
A commonly used statistical measure of relationship in price action is correlation. A positive correlation suggests that prices are moving in unison.
Portfolio managers use correlation to monitor the risk inherent in their portfolios. If the value of their portfolio holdings increases or decreases simultaneously, the expected results are more at risk.
Across the developed world, we are simultaneously seeing rising lending rates, falling expectations for business outcomes, worsening business and consumer credit, and volatile currencies.
Market volatility is holding back investments and leading to cash hoarding, mainly in US dollars.
With managers of pension funds, hedge funds and mutual funds all having the same thought process, we are seeing a concerted injection and withdrawal of capital into global equity markets. This leads to an increase in stock market correlation.
The correlated price action will provide intermittent respite, but also indicates a general sense of unease in the market. Investors group together in a herd like cattle rather than grazing independently. Any trigger could send the herd catapulting towards the exits in a stampede.
While the recent price action is a welcome turn of events for the international investor, caution should be exercised as this is a turning point in the markets.
As the slump in Europe continues, OPEC threatens major production cuts and inflation is still not fully contained, the short-term outlook for equities is still highly uncertain.