Could Global Stocks Run Out of Steam?

Floating concerns regarding slowing growth, volatility in oil and decreasing corporate earnings projections.

Photo: Bloomberg

Global stocks ran out of steam on Monday, with European shares in energy and mining coming under pressure as well.

The only exception was Baye’s shares which seem to continue soaring.

On Friday, the pan-European index saw its gains of four weeks in a row end, and traded flat on Monday morning.

Oil saw a pullback from its recent gains, and energy and mining companies, which were the stepping stone for the recovery of global stocks, shortly followed.

Concerns of a global oversupply of Brent crude oil were fueled since the end of last week as U.S. oil rig data continued to drive uncertainty and the commodity price went down by 1%.

On the bright side, amid speculation of further consolidation in the chemical sector, shares in German pharmaceuticals firm Bayer AG increased by 4.6%.

The dovish Fed statement fueled the rally of U.S. indexes back into positive territory for the year. According to Steve Weeple, global portfolio manager from Standard Life Investments, the moves will not be as severe from now on, as the reversal that occurred was fast.

On the opposite side is Brett Mock, director at JonesTrading Institutional Services LLC. He states that the gains might be limited because they are being supported by the distressed energy sector.

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He further said that the possibility of a sustained rally is highly unlikely because it will require a surprise from earnings.

The greenback was able to drag American earnings in recent quarters, but it is believed that this will subside, because of the sharp drop in the dollar against euro, yen and all emerging market currencies after the dovish statement of the Federal Reserve.

Treasury yields continued to the downside, after the ten-year briefly reached 2% last week, which is considered as a primary trigger for investors to buy 10-year Treasuries when government bond yields are low worldwide.

The majority of the recent stock gains have been supported by an accommodative stance from the world’s central banks, according to analysts.

Benoit Coeuré, from the ECB’s Executive Board, stated that the recent EU stimulus will most likely support the recovery, but it will not be enough to heal the eurozone economy completely.

At the moment, investors are concerned whether the recovery in global stocks will continue to move further, due to floating concerns regarding the slowing growth, volatility in oil and the decreasing corporate earnings projections.

Jim Balfour, an economist at Loomis, Sayles & Company, said that if the dollar stabilizes, it can provide support for oil, and it will most likely reduce drag for U.S. companies translating earnings from abroad.

 

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