Equity markets weekly
USA
The surprisingly strong reading of the latest ISM manufacturing index gave some boost to the equity markets – for the time being. However, even with that the downtrend regarding economic expectations for the second half-year is rather interrupted than terminated. The predominating negative economic dynamic will most certainly continue to put the moderate valuations and ample available liquidity in the shade. Therefore, we expect the next big movement for US stock indices to be towards lower index levels.
Europe
Better than expected US as well as Chinese leading indicators have been able to push recession fears to the background for the time being. Nevertheless, we doubt that there are enough positive drivers left that will lift stock markets to higher levels until year end. Especially we expect that economic data will become worse in the upcoming months which should mainly be reflected in clearly deteriorating leading indicators. In this environment neither positive valuations nor arguments for ample available liquidity can help. Considering that also the support of the positive reporting season will fade away, we see hardly positive signals for the stock markets.
Japan
Japanese stocks as well as the Yen took a breather in the midst of the past trading week as economic leading indicators surprised to the upside. However, we still stick to our scenario of a significant deceleration of economic activity in the course of the forthcoming months. Therefore we do not believe that cheap valuations by historical standards are enough support to defend current index levels, especially as they are somewhat deserved given the subterranean profitability of Japanese companies. However, with an intensifying double dip debate Japanese stocks will further underperform its counterparts.
Source: Raiffeisen Research, 3 September 2010