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Current Financial Market Signals - August 2017

Below is the latest colourful dashboard updated from 15 August 2017 by 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, so the dashboard in isolation means little as it needs to be compared to a previous dashboard (top right hand corner). Changes vs last update are circled.

The key take outs from Table 1 are:

  • Globally, the pick-up in economic growth we’ve witnessed is starting to wane, but profit growth (earnings momentum) looks intact.

  • In the US, equities long term price momentum remains positive.

  • Economic momentum in the Eurozone remains positive. Macro surprises have, in the main, also been positive.

  • In Australasia, China’s economic trend remains positive. Australian economic momentum also remains positive, furthermore, earnings estimates have improved a bit after worsening over the last five updates.

Important: Ineichen does warn about complacency in financial markets and the very low level of volatility across markets does seem at odds with the volatile political climate. Historically September and October have been weak months on global exchanges so we are somewhat cautious as to how ‘green’ things really are.

When compared to the dashboard in May 2017 (Table 2), there have been some noticeable negative changes to Fundamentals and economic trends.

Table 1

Table 2

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?

Broadly there are fewer risks, green ticks are a pleasing sight compared to early 2016, illustrated in the top right hand corner of Table 3 which as you can see was lit up with ‘time bombs’.

The sum of positive indicators has further increased over the last month to a new all-time high. Key changes over the month include- economic momentum indicators in Europe and China have improved; long term price momentum in China has turned positive.

Table 3

July 2017 bottom line tally:

What about Australia?

It may not feel like it, but according to Ineichen’s data, economic momentum is upward and long term momentum in the equity market is generally positive. Earnings estimates are relatively steady and the current reporting season is reasonably evenly spread between upward and downward surprises.

Table 4

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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