The prospect of financial stimulus in Germany and China has lifted the market mood a touch but there is still plenty of doom and gloom around about the prospects for equities.

This is not unwarranted given the long list of risk factors being weighed at present. However, an interesting way to look at the current situation is to consider the events required for investors to become more cheerful.

New research from investment bank Morgan Stanley is instructive in that regard. Its strategists are currently negative on both bonds and stocks but they identify four developments which would make them change their mind.

One: Better short-cycle data such as purchasing managers’ index would make the team more optimistic that earnings estimates can be hit. 

Two: Trade mitigation, with de-escalation needed from both the US and China

Three: Central banks over-delivering versus expectations or these expectations being lowered. Four: Valuations moving closer to average levels.

WHAT TO LOOK FOR

Short-cycle data offering insight into the health of different economies has not been too encouraging of late. UK PMI data is released at the beginning of each month, but more relevant given the size and influence of their respective economies are the releases for China and US. The closely followed China Caixin PMI data is out on 2 September, with the US release following on 3 September.

China and US are also the key actors in the current global trade tensions. The delay to tariffs on Chinese imports to the US recently announced by the Trump administration was positive.

However, a resumption of talks with a realistic hope of resolving the situation would have a more telling impact. There are hopes that negotiations could resume in September.

MONETARY POLICY CLUES

It might be difficult for central banks to deliver more than expected, given expectations over the pace of rate cuts have ratcheted up rapidly so far in 2019.

However, the apparent willingness of authorities in China and Germany to take action to prevent an economic slowdown could be a signal these expectations are about to be surpassed.

The Jackson Hole symposium, a big meeting of leading financiers and central bankers which is due to get underway on 22 August, could offer some insights into current thinking on monetary policy.

The final piece of the jigsaw for Morgan Stanley is a shift in valuation down to ‘average’ levels. However, for investors in UK stocks this is less of an issue.

While many developed markets, most notably the US, are trading at elevated levels, the uncertainty around Brexit means British shares have been depressed for some time. The looming 31 October date for the UK’s exit from the EU means clarity on this issue one way or another could be imminent.

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