US
US equities climbed to new heights as the week drew to a close with the Nasdaq Composite surpassing its previous peak of 5048.62 points from the year 2000 that marked the height of the dot-com era. The tech-heavy index advanced 3.2% over the last 5 days to close Friday’s trading session at 5092.08. Among other factors, greater diversification and a maturation of the tech sector have contributed to Nasdaq’s ascent from its millennial lows. Today, the share of technology stocks accounts for only 42% of the index (compared to 65% during 2000), and the sector is dominated well-established firms like Google and Apple that do not seem to have much in common with the internet start-ups of the past days. Moreover, Consumer Services and Health Care, the latter particularly dominated by Biotechnology stocks, have assumed reasonable weightings in the index, representing 21% and 17% respectively. The index’ strong performance was further underpinned by gains of technology heavyweights Microsoft and Amazon in the course of the current earnings season. The former reported an increase in sales of nearly 6.5% which topped consensus estimates, sending shares higher by 10.5% (its biggest gain in six years) and propelled the company to the third rank of the U.S.’s largest companies by market value.
Besides the Nasdaq, also the S&P 500 closed at an all-time high of 2117.69 (+1.7% compared to the previous week) points whereas the Dow Jones rose 1.3% to a level of 18080.14. With respect to the current round of earnings releases, Q1 sales figures of companies in the S&P 500 have been hit by an appreciating US Dollar that rose 22% against the Euro over the last 12 months in anticipation of diverging monetary policies in the two currency areas. As of Friday’s close, 55% of the 201 companies that have reported their earnings so far, released sales below analyst expectations. Prominent victims of the adverse currency effects included global consumer goods giant Procter & Gamble whose Q1 sales took an eight-percentage-point hit, but also Facebook that reported an adverse impact of seven percentage points ($190m) on first-quarter revenue. However, differently from sales, so far 73% of companies reported earnings that beat consensus estimates. This was in part due to the largest downgrade in these estimates since the financial crisis (on a per-share basis S&P 500 earnings predictions decreased by 8.2% since end-2014) and contributed to the stock market strength by contravening the disappointment in revenues.
Moreover, a series of softer-than-expected economic data from the US over the course of the week pushed back expectations for a rate hike by the Federal Reserve, buoying equities and weighing on the value of the US Dollar. Unemployment claims that came in higher than expected as well as lower than anticipated new home sales and core durable goods orders (that strip out more volatile transportation items) again raised doubts about the strength of the US economic recovery. Additionally, upbeat data on German business climate supported the EUR as the IFO index rose to a 10-month high. Consequently, the greenback ended Friday’s session lower at 1.0875 against the Euro, and Treasuries also reduced earlier losses towards the end of the week. The yield for 10-year maturities stood at 1.91% up 4 bps from the prior week.
With respect to the week ahead, the focus will be on Wednesday’s release of preliminary GDP data for the first quarter of the world’s largest economy. Consensus estimates look for an increase of 1% compared to the prior quarter. Later the same day, the FOMC will release a statement following a monetary policy setting meeting which might give some more insight into the timing of the first rate hike. Additionally, more than 20% of S&P companies are going to report earnings in the upcoming week. Among them Apple, Exxon Mobile and Pfizer.
Eurozone
The week started with a good bounce across the European stock indices (Euro Stoxx 50 +1.20% on Monday) after the sell-off of the last days of the previous week due to Greece’s outcome concerns. However, Greek stocks failed to join the party, with Athex slipping 0.1% showing again the decoupling effect across European assets’ correlation if compared to the sovereign crisis period. Later, after taking a heavy hit on Tuesday of -3.33%, the Greek index managed to close the week positively back to the level of 3 weeks ago (761.56) with a reassuring market pricing lower probabilities of default and/or Grexit (see this week article on Greece).
The same reasoning is found in the movements of the 2Y Greek yield where, after spiking an intraweek high of 30%, pulled back sharply down almost 400bps to 26.35%.
On the other hand, on Thursday, the estimates of April’s Eurozone composite PMI unexpectedly slipped from 54 to 53.5 missing expectations of an improvement to 54.4. This, together with an unexpected drop in the ZEW, sparked some disappointment across traders and economists who were expecting continuing growing momentum driven by the ECB’s QE. Euro Stoxx 50 closed -0.71% on that day. However, later on Friday, an upbeat IFO survey of German business confidence restored hopes of the analysts.
A movement worth noting is the pullback on the 10Y Bund yield, which closed the week 7.5bps higher at 0.152% after touching the record low yield of 0.05% at the beginning of the week. This movement seems to be more technical driven, as Greek concerns should have pushed down yields further given the safe haven nature of the assets.
EUR/USD, after touching a low of 1.0658 during the Greek sell-off, closed the week almost stronger at 1.0875.
UK
The countdown for UK elections has already started. Just two weeks are left from now to the Election Day of May 7th. Recent polls indicate that the result looks very close, with both the Labor and Conservative parties unlikely to get enough votes to govern alone, meaning that the idea of a coalition is becoming real.
However, the focus of the week shifted toward the economic calendar releases and BoE’s Minutes. One of last week’s most relevant data releases for the UK was the retail sales figure, which fell short of expectations by nearly one percentage point (-0.5% versus +0.4%) . This fall was mostly due to a sharp fall in the energy (fuel) sector, however excluding the sector the figure still shows a meagre 0.2% growth. Such data seems to be incompatible with the minutes of the Monetary Policy Committee meeting of Wednesday, interpreted by some operators as a sign that the BoE will raise interest rates earlier than previously expected. There is still considerable disagreement among operators concerning the Central Bank’s next moves: the yield curve prices in a two quarter-point rate increase within the next two years, but many claim that weak data will eventually force monetary authorities to delay rate hikes. On the other hand, the Central Bank statement mentioned that the pass through of lower import prices on CPI has been faster than usual, which might cause inflation to rise more than expected as the pound strength fails to cool overall price increases. Such news caused the pound to appreciate sharply both against the dollar and the euro, both trading now just below 1.3967€ and just above 1.5175$ respectively, while the 10Y UK Gilt yield closed up by 7.7bps at 1.649% with respect to the beginning week’s level. New data releases in the following weeks might help shed more light on the Central Bank’s intentions.
For what concerns UK equities, the FTSE 100 closed on Friday at 7,070.70 picking up 1.1% for the week. The British blue-chips index is up 7.7% so far this year. Friday’s gains pushed up thanks to HSBC, which shares lead the index by climbing 2.9% after the bank said it is reviewing whether to move its headquarters out of the U.K. back to its origins in Hong Kong, where most of the business is run. The world’s third largest bank by assets is assessing regulatory and structural reforms enacted after the financial crisis. In particular, HSBC’s review comes after the U.K. government said it plans to raise the rate of a bank levy to 0.21% from 0.156%. The bank had a bad start of the year: politicians and regulators have attacked it over the way its Swiss arm for helping clients dodging taxes, while investors have complained about falling profitability. Finally, also Standard Chartered is expected to carry out a review of the HQ location after the elections.
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