Concerns over Spain, high oil prices and the speed of an economic slowdown in China will lead to a shift in investor sentiment in the second quarter, prompting a pause in the rally that saw markets climb to multi-year highs in the first quarter of 2012, analysts said on Monday.
“I expect to see a little bit of a slowdown with the U.S. data. From China we have a bit of inconclusive GDP information as well. Clearly PMI has been quite solid but you’re talking about a slowdown in growth,” Ana Armstrong, CEO of Armstrong Investment Managers, told CNBC on Monday, the first trading day of the second quarter.
“We still have a euro zone situation (that is) not completely resolved,” she said. “So we think that the whole risk rally can get a bit of a break.”
The Dow Jones Industrial Average and the S&P 500 logged their best quarters in 14 years in the first quarter of 2012, while the Nasdaq had its best first-quarter performance since 1991.
Meanwhile European stocks marked their best first quarter since 2006, and a number of Asian markets also ended the quarter on multi-year highs.
Analysts at Barclays agree that markets will lose steam after the strong rally.
“The equity market uptrend in place since the beginning of this year looks to have petered out for now,” they said in a note to clients on Monday.
“We have tempered our bullish stance on European equities and expect markets to enter a sideways correction phase in the short term as global macro momentum starts to lose steam (versus expectations) and peripheral risk re-emerges,” Barclays said.
The pause is due to lingering euro zone debt concerns, high oil prices, fears over the Chinese economy, as well as concerns about politics in a number of key European countries.
France holds presidential elections in the second quarter of 2012 and parliamentary elections are scheduled in Greece this quarter as well.
Roger Nightingale, strategist at RDN Associates, said “lots of little things, mostly politics” could knock the equity market run from the first quarter off course.
“The politicians are in terrible trouble because they are unpopular and they know they are going to be – most of them – thrown out. The incumbents are going to be thrown out. And when you are in that situation, you tend to behave a little erratically,” he said. “Some of those erratic behavior patterns can have implications for the markets.”
More long-term, Nightingale is concerned about central banks raising interest rates and tightening money.
“The effects of it would be pretty jolly sizeable, and that is the thing that would make me negative about markets,” he said.
What Will Trigger Markets Higher?
With such a high degree of uncertainty, investors will need clear signs to once again take on more risk and re-ignite the rally.
“Catalysts to wake equity markets from this afternoon siesta could be a confirmation of a soft landing in China, a pullback in crude oil prices, or any calming of Iranian geopolitical risk,” Barclays analysts said.
Spanish ministers last week introduced new measures to achieve much-needed budget savings, but investors are still waiting for further details of those measures.
“Initial reactions from the bond market seem favorable,” Barclays said.
In China too, there were mixed signals, with some pointing to positive news, Barclays said, citing a fall in headline inflation in the country and solid commodity price indicators.
Iran is another key factor, Nightingale said.
“If there is another allied invasion of something actually in the Middle East, the oil price spikes and the economies take another dive. It’s another anxiety but it’s a politically induced one, rather than an economically induced one,” he said.