Global equity markets continue to progress like an amateur golfer, hacking their way from one hazard to another while making just enough headway to suggest that it might be a reasonably good round at the end of the day.
We entered the US earnings reporting season expecting encouraging data and the first few reports have not disappointed. First out of the blocks was Alcoa, with results that demonstrated a notable improvement in demand for aluminium. The second big announcement came from Intel, its bestever quarterly profit of $2.9bn signalling a significant improvement in secondquarter technology spending from businesses as well as consumers. At the time of writing, early indicators suggest that this reporting season will continue to be well received by markets although we should not be too alarmed by one or two high-profile disappointments.
Despite macroeconomic data from the US pointing towards sustained profitability for the corporate sector, job creation continues to move at a pedestrian pace. Private payrolls and job openings data have continued to trend upwards over the last three months, even if the rate of job creation slipped back in June.
This suggests a degree of reluctance on the part of companies to hire, some-thing which I suspect is more prevalent among the US’s smaller businesses, traditionally the engine of job creation. Under-standable caution emerging from the recent recession, together with reticent lending by banks, has hampered employ-ment growth but if these fears can dissi-pate, there is the possibility of a positive step change in employment data.
In the UK, unemployment data appears a lot more encouraging, having peaked at lower levels than in previous cycles. After a dip in the first quarter, possibly due to election uncertainty, an increase in private sector job openings in the second quarter has more than offset the fall in the public sector. This bodes well for an upturn in consumer spending and enhances the prospect of a self-sustaining recovery. The Government will naturally be hoping that this is the case.
While I acknowledge that markets fear the recent cuts in government spending may cause an economic double dip, on balance, I think this is unlikely. Historically, government spending has seldom been decisive enough in itself to cause an upturn or downturn, the big swing factor tends to come at the corporate level. Investors are perhaps looking in the wrong place regarding recessionary pressure. Once again, second-quarter earnings will provide us with greater guidance in this respect.
Beneath all the bluster surrounding aggressive departmental cuts might be some rather astute politicking. Markets needed a tough emergency budget and Osborne duly obliged, buying time in the process. It will be easier to soften this hardline stance once the recovery is seen to be under way. Alternatively, if conditions deteriorate further, they could perhaps embark on a course of tight fiscal policy and looser monetary policy in the shape of more quantitative easing – taking away with one hand while giving with the other.
Bill McQuaker is head of equities at Henderson Global Investors