Recent market rally prompted by improved outlook
Europe’s main stock markets were little changed at the open today, failing to mirror strong overnight gains in Tokyo and on Wall Street.
Stock markets have notched up some decent gains in recent weeks as the economic outlook appears to have improved dramatically on the back of China’s economic reopening after strict Covid-19 lockdowns and energy prices continue to abate.
The International Monetary Fund has said it intends to revise its outlook for economic growth.
It had previously forecast that up to a third of the global economy could be in recession this year.
“What we’re seeing since the start of the year is a slight improvement in expectations in Europe. Fears of gas running out have dissipated,” Aidan Donnelly, Head of Equities with Davy said, cautioning that winter is not over yet.
“Even some of the inflation data is coming in slightly better than expected. The expectation is that we could see interest rates cuts coming at the back half of the year. There is a potential between central banks and markets coming,” he explained.
Mr Donnelly said the pace of increase in rate hikes was likely to slow significantly throughout this year.
“The markets are pricing in a few more rate hikes this year. Then the question is as to whether they keep them at those high levels or whether – as the market is pricing in – will we see a dip in the back half of the year,” he said.
Edward Moya, Senior Market Analyst for The Americas with OANDA, said traders were keeping a close eye on earnings as well as US growth and consumer spending data in the US.
“Corporate earnings have been coming in softer than expected and that should continue to drive recession trends, which are what is needed to get the Fed to stop tightening,” he said.
Aidan Donnelly said about 10% of companies in the US had reported so far with a fairly mixed outcome for earnings.
“By the end of the week we should get a much clearer steer on where things are and I think it’s going to be more about what company management is saying in terms of commentary rather than what happened in the fourth quarter,” he explained.