As the market melts higher with just about every week investors are becoming increasingly risk averse. But as we know, stability tends to create instability. In a recent research note Societe Generale analysts highlights the two risks to be particularly aware of as markers move higher and risks increase:
Risk 1: Earnings growth expectations weaken globally
- Recession in Europe continues to squeeze earnings which are nevertheless fairly high overall thanks to tight control of costs,
- Chinese industrial profits reportedly fell 5.4% yoy in July, an acceleration versus the previous month. The ferrous metals smelting sector saw the sharpest drop in profits,
- Although earnings growth in the US remained positive, it has become less robust and could deteriorate further if economic growth stalls.
Risk 2: Potential oil shock could hurt recovery
- Oil prices bounced back over the last two months, supported by sanctions against Iran, and more recently supply concerns,
- Growing tensions with Iran could push oil prices higher and hurt global economic,
- Gold traded slightly higher in August crossing its 200- day moving average on the back of QE hopes, but remained on hold ahead of central bank meetings,
- Non-ferrous metals stabilised over the year due to weaker demand, as reflected by poor PMI readings in August – notably the HSBC China PMI down to 47.6.
Source: Societe Generale