Here is a selection of five charts that FT Markets believes are important signals for investors as the second quarter begins.
1. US equities
How expensive does the US equity market look? This is perhaps the biggest question facing money managers. The answer is “very”, based on the S&P 500’s 12-month forward price-to-earnings ratio, divided by the current low level of Vix, or implied volatility, as the chart shows below.
Plenty now rests on first-quarter results from corporate America — and the outlooks from chief executives — to justify current lofty valuations. Wall Street analysts, however, are already trimming their forecasts for the profits that companies have made. First-quarter annualised earnings growth is estimated at 9.90 per cent, down from 10.57 per cent just a month ago, according to S&P Global.
Another gauge of the extent of current faith in US equities is, of course, the Shiller P/E ratio — you can see it at this link: http://www.multpl.com/shiller-pe/. At a current reading of 29.02, the measure trails its two famous peaks set at the height of the dotcom bubble and in the roaring twenties.
Cape reflects the US price/earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio.
2. Brent crude
One asset that does drive volatility across other markets is the price of oil. Of late, Brent crude, the global benchmark, has been dominated by a tug of war between the Opec production cartel seeking to staunch supply and the US shale industry that has been encouraged by the recovery in the price during the past 12 months to drill.
This stand-off has left the price in a tight range, with less than $10 separating Brent’s high of $58.37 and low of $49.71 in the past three months. The summer driving season in the US is expected to be a fillip for demand. Whether it will be enough to offset a continued rise in US inventories is shaping up as a key test for the oil price.
3. The pound
Turning to the $5tn foreign exchange market, sentiment appears to be brightening towards the pound, with the currency just shy of a key long-term measure of momentum.
The pound has not been above its 200-day moving average since the UK voted to leave the EU last June. At $1.2660, it is now within reach. As some foreign-exchange strategists lift their 12-month forecasts beyond $1.30, early signs of progress in the Brexit divorce between London and Brussels may add fresh momentum.
4. US bonds
Equity investors are not alone in risking complacency. One possible sign among US bond investors is that companies have sold record amounts of investment grade debt and also lengthened the average maturity of their bonds.
In a world of low yields and the absence of much higher inflation, investors have been willing buyers of such debt. The risk now is that an acceleration in economic growth and higher inflation has the potential to hit the owners of those bonds with long duration very hard.
As interest rates rise, the sensitivity of the price of longer-dated bonds is higher than that of shorter maturity debt.
Right now, worries over a duration shock for fixed-income portfolios is played down by investors who believe that the global reflation trade and fiscal stimulus from the Trump administration will not amount to a game changer for the corporate bond market.
5. Change in six-month credit flows
It’s not just Donald Trump’s promise to turbocharge the US economy that has sharpened appetite for riskier assets such as equities. Investors have also been encouraged by signs that economic growth is improving in the eurozone and China.
However, one troubling aspect of the bullish performance of risk assets is a measure of the six month change in the flow of credit — in Europe and China, as well as the US — which has slumped in recent months.
“Until the conflict between soaring animal spirits and weakening credit impulses is resolved, we will lean against any rise in high-quality bond yields and equity prices,” according to BCA Research