It felt like another week of the same. Robust economic data and great earnings drove equities markets broadly higher and sustained risk taking sentiments. US 3Q17 GDP estimates came in better than expected, notching a 3% q/q annualised growth rate. While GDP data is always backward-looking, a strong number is always good for sentiments nonetheless. Europe’s flash PMI data was robust as well. While the composite PMI dropped more than expected to 55.9 in October (a 0.8-point decline), it still indicated a firm pace of expansion. Furthermore, the manufacturing PMI continued to tick higher.
On earnings, Europe companies’ results releases looked to be modestly ahead of expectations. Across the pond, US mega tech firms put in very strong growth and earnings numbers at the end of last week, with Microsoft, Amazon and Alphabet beating expectations by a wide margin. Info Technology and Financials still look to be the US sectors that investors should be positioned in to tap into the growth and reflation theme that we think will continue to play out.
Monetary policy was also an incremental plus to the risk-on environment after the ECB policy decision came in in-line with market consensus. The ECB extended asset purchases for another 9 months, starting Jan 2018 to Sep 2018, at a reduced rate of EUR30bn per month (from the current pace of EUR60bn). No end date to asset purchases was indicated. The Governing Council left the programme ‘open-ended’. A more hawkish-than-expected decision was a risk that some markets had factored in, looking at how the EUR/USD tanked after the decision. It should be a relief to equity investors that yet another major central bank is willing to err on the side of caution with regards to its pace of withdrawing policy support.
In Asia, the main events that mattered was the unveiling of the 19th Politburo Standing Committee (PSC) in China and bank recapitalization by the Ministry of Finance in India. Most analysts’ commentary conclude that the new composition of the PSC indicated a further consolidation of power by President Xi Jinping. The third-ranked Politburo member is now held by his political ally Mr Li Zhanshu. And most of the 15 new faces to the 19th Politburo (a 25-member decision making body that is ranked just below the PSC) are President Xi’s associates and loyalists.
The other stark difference from the past is that the new PSC make-up did not include any clear candidates to eventually succeed President Xi, suggesting the possibility that President Xi may stay in power beyond the next 5 years. This potentially indicates a greater flexibility for President Xi to implement his policies and possibly greater leeway for the political leadership to endure the short term pains to achieve make greater in-roads to the long term reforms that they had intended. India’s sizeable bank recapitalization program of INR 2.1tn will be positive in addressing the problem of overextended banks and highly indebted corporates that had been a drag on the Indian economy. The case to be bullish on Indian equities may have just received a shot in the arm.