Global stocks rallied on Monday after a weaker-than-anticipated jobs report from the U.S., which swayed investors to rethink the timing of an interest rate rise, with a 2016 hike now looking more likely.
Markets welcomed the worse than expected data, with many interpreting the news as a return to the rising trend in stocks after a terrible third quarter.
But when planning a longer-term outlook for stocks as earnings season gets underway, investors looking to plan for the final three months of the year are fixed on the strength of the dollar.
“We have the seasonal patterns that really take over now. I do think if you contrast where we were with last year – the chart patterns look very similar to the S&P 500 and the Russell 2000 small cap index,” chief investment officer (CIO) at Palisade Capital , Dan Veru told CNBC.
“But the big difference is the big appreciation in the dollar over that time. So I think it is going to be a much more selective recovery of shares, it is going to be more the domestically focused companies, more towards the small caps rather than the multi-nationals which have big international exposure,” he said.
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Veru expects interest rates to move next year, partly on concerns over the dollar as 45 percent of S&P 500 revenues comes from outside the U.S., meaning greenback strength could seriously weigh on earnings.
“I think first quarter at the very earliest, (for an interest rate rise) the Fed is very concerned from everything they have announced, that this economy could slip back into recession,” said Martin Leclerc, CIO and portfolio manager at Barrack Yard Advisors.
U.S. stocks traded about 1 percent higher Monday, attempting to extend a recent recovery from correction levels, as investors awaited earnings reports and digested implications from Friday’s jobs report on the timing of a rate hike.
Few analysts could find any positives in the September jobs report, which showed the U.S. economy created 142,000 jobs, a number far below the expected 203,000. August and July figures were also revised lower.
Weak for how long?
Meanwhile the dollar weakened against the euro to $1.12 as traders pushed back expectations of a Federal Reserve rate rise to early next year.
But with the European Central Bank buying up bonds at the rate of 60 billion euros per month and the central bank’s President, Mario Draghi, pledging more quantitative easing if needed, analysts are not convinced of the long-term trend of dollar weakness.
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Stocks in Asia and Europe surged on the poor jobs data on Monday, with the pan-European STOXX 600 rallying close to 3 percent, with miners topping indices as risk appetite prevailed.
“The euro in the second quarter just past was the biggest tailwind for earnings for 20 years in terms of the fall in the currency, so of course the U.S. are on the other side of that,” said head of European equity strategy at UBS, Nick Nelson.
“We have volatility in the next few weeks, I think the message in Europe is profits are very depressed and these are starting to turn,” Nelson added.
Japanese fund manager Nikko Asset Management moved to a “neutral” stance on global equities from “overweight” for the first time since 2011 as the group has turned less optimistic on U.S. corporate earnings.
The Tokyo-based firm forecast that U.S. equities will underperform over the next six months to March 2016, thus earning an “underweight” stance, whilst predicting Europe and Japan will outperform over the next six months, with the group boosting its allocation to “overweight”.
“We calculated that global equity valuations are at reasonably fair levels and that stocks can rise in Europe, Japan and Australia, but because we are less optimistic on the United States, we do not think it is worthwhile, especially with the recently increased volatility, to be aggressive on global equities overall,” said chief global strategist and head of the group’s investment committee John Vail.
“We have been overweight global equities for U.S. dollar-based investors, except for one neutral quarter, since September 2011 but we now believe that neutral is the proper stance,” Vail added.