US
US equities failed to push through record territory and retreated from last Friday’s all-time high driven down by disappointing earnings reports and poor economic data. On Friday, the S&P 500 closed down at 2,108.29 from its Monday record peak of 2,125. Nasdaq Composite, the tech-heavy index, fell to 5,005.39 from last Friday closing high of 5,048.62 points.
As far as concerns corporate earnings, Apple and Exxon-Mobil reported better-than-expected figures. Apple topped analysts’ expectations with a 27% revenue growth to $58bn led by surging IPhone sales in China while Exxon-Mobil, the world’s biggest listed oil company, reported a less-offsetting decline as strength in its refining business helped easing losses driven by the oil slump. Nonetheless, other results were less celebrated as most of the companies that make a large portion of their revenue abroad where struck by the greenback’s surge. Notably, both Pfizer and Whirlpool cut their full year forecasts blaming a stronger dollar.
We have looked at GDP figures in more details, as they were the main driver of asset prices changes this week. GDP preliminary figures released on Wednesday disappointed even pessimistic forecasters. The US’s economy expanded by a sluggish 0.2% in the first quarter, just a fraction of the 1% predicted by economists. GDP figures came out during the FOMC meeting on monetary policy and a few hours later the FOMC acknowledged the faltering of US economy and left short-term rates near zero levels, fuelling market expectations that an interest rate hike is unlikely by the middle of the year. However, the Fed pointed out that some of the downward pressure on growth is due to an exceptionally weather-disrupted winter and a West-Coast port strike. Therefore, it is expecting a moderate rate of growth after recent weakness. Strengthening this position, economists at JPMorgan Chase have found out a seasonal slowdown of US GDP growth with first quarter figures averaging 1.6% lower than other quarters’, in the last 20 years. Eventually, the Fed stated that further improvements in the labour market, especially as far as concerns wages, were necessary in order to lift interest rates. Such improvements could be partially seen in Thursday’s better-than-expected figures. Both continuing and initial jobless claims were lower than forecasted. Moreover, the Employment Cost Index, a gauge of employees’ wages and benefits, rose 2.6% year-on-year.
In light of the weak figures released during the week, the dollar index, a gauge of the strength of the US currency against a weighted basket of rivals, was down to 95.214 from 96.76 points. Furthermore, the 10-year Treasury yield rose from 1.92% to 2.11%. Even though a yield surge may
seem counterintuitive considering the gloomy economic data released in the week, one possible explanation is that GDP figures are backward-looking and, therefore, do not directly affect yields (which are already pricing in accelerating growth in the second quarter). Moreover, new supply in the European bond market, paired with a slight increase in European yields might have made US yields less attractive causing a sell off.
As regards next week, the key economic data being released are the ISM non-manufacturing PMI on Tuesday and the Unemployment Rate, Non-Farm Payrolls and Average Hourly Earnings on Friday. The focus should be to the labour market key figures released on Friday. As a matter of fact, a positive reading, especially in the AHE, will signal the much-craved improvements in the labour market and wages, which could, if followed up next month, lead to a mid-year rate hike by the Fed.
Eurozone
The highlight of the week has been the unexpected reshuffle of Greece’s negotiation team on Monday, after Tsipras’ decision to sideline Yanis Varoufakis, current finance minister of Greece and head of the bargaining group, who had been unable to cope with negotiations during last Friday disruptive meeting in Riga. George Chouliarakis and Euclid Tsakalotos, a placid Oxford student, replaced Varoufakis and his co-ordinator respectively. The upbeat momentum triggered a sharp rise in the main European equity indices, with ASE jumping 4.4% on Monday.
Nevertheless, the overall performance of European equity has been fairly poor during this week. The reasons are to be found in the weak US Q1 GDP data below expectations, which has caused the EUR/USD rebound on Wednesday, peaking at a 8-week high of 1.1248 after it reached its 12-years low of 1.05 two weeks ago. The XETRA DAX index has plunged 2.5% this week, dropping 4.3% in April only, whereas FTSE Eurofirst 300 tumbled 3%. After peaking at 1.1273, the EUR/USD plunged again slightly below 1.12.
The choppy situation in the bond market was reflected by the large swings of European government bonds yields. The positive outlook on Greece’s situation, albeit the hefty 750m € due to IMF in May and almost 2bn € for pensions, sparked optimism that it could finally reach an agreement and unlock the final 7.2bn € of the bailout programme. Yields on 2-years Greek bonds lost some 580 bps over the week, from 25.6% to 19.8%, whereas that on 10-year dropped from 12.7% to 10.7%. German Bunds yields, instead, dramatically rallied to 0.357%, more than seven times the record low of 0.05% set two weeks ago. The disappointing 5-year German bonds auction (3.27bn sold out of 4bn) might be one of the reasons. French, Spanish and Italian 10-years bonds show a similar, though more controlled, upward path.
The significant rise of government bonds yields seems inconsistent with the results expected after QE launch. Indeed we have witnessed very low, where not negative, yields during the last month. Nevertheless, this has to be considered a positive outcome, as data suggest. Higher economic growth and inflationary expectations often result in higher yields. The ECB statistics show that M3, a broad money measure, has increased by 4.6% since March 2014 (more than ECB 4.5% target), indicating inflationary and growth expectations. Also, private lending has shown positive growth for the first time in 3 years, possibly marking the end of credit squeeze. Prices are reported to be flat, thus QE apparently saved Europe from the deflationary slump that casted a shadow over Eurozone in January, although the inflation still remains well below the ECB’s 2% target.
Unemployment rate is steady at 11.3%, as in last month’s figures, with the lowest rate in Germany (4.7%) and the peak in Greece (25.7%). The ECB is leading the foundations for Eurozone recovery, but the process still has to go on track.
UK
In one week English people will be asked to express their preferences for the general elections. The two candidates are David Cameron (Tories) versus Ed Miliband (Labour Party) and the forecasts on the outcome are very balanced, increasing the risk of further consultations after the first vote, opening a possible period of instability. This is due to the fact that it is difficult to sign non-natural alliances in the UK. The balanced forecasts increased the uncertainty of the FTSE 100 index, as a possible victory of the labour party will badly affect the market. In fact, Miliband is not loved by the financial environment, neither by entrepreneurs, because of some points of his manifesto, as the one that limits to 5% maximum the profit that entrepreneurs can make with the public sector.
Being the two leaders very competitive, the FTSE 100 did not perform well this week, as it opened at 7100.28 points on Monday and closed at 6985.95 on Friday night, leaving on the table more than 1.65%. This is not the only reason of the weakness of the index, as on Tuesday the data on the GDP growth for the first quarter was released: the expected growth was +0.5%QoQ, but the GDP grew just of the 0.3%QoQ, a lower figure if compared to expectations.
The lower than expected growth of GDP has been weakening also the value of the Sterling against Euro: the FX market opened at the beginning of the week at 1.3962 and depreciated to 1.3516, losing more than 3.23%.
Next week will be crucial for England, since we will have the first data regarding the winner of the general elections that will create a high volatility period in both the stock market and the FX market. Other two important macroeconomic data will affect the market: the PMI in the construction industry and data regarding the trading balance of the Country.
Japan
The week started with a downgrade for Japan. Fitch lowered its sovereign debt by one notch, from A+ to A. The agency explained this decision was due to concerns over the government lack of commitment to tackle the fiscal consolidation. Prime minister Mr Abe, in fact, delayed a second sales tax increase scheduled for October. The debt to GDP ratio is now supposed to increase to 244% by the end of the year. The yen weakened slightly against the dollar right after the news, shifting from 119.13 to 119.19.
The Nikkei225 Index seemingly did not react over the news and was up nearly 0.30% by Wednesday, thanks to good news on dividend side, coming first from Fanuc. However, weaker than expected data from Honda and Takeda, and the bad news on the USA GDP pushed it down by 2.69% to 19520.01 points, its biggest one-day drop in four months.. It continued the descent throughout the week and eventually lost more than 3% by the end of the week. Toyota Industries Corp, the biggest blue chip on the Nikkei market, lost nearly 6% in two days.
Japan’s inflation was in the spotlight this week as well. Bank of Japan announced it expects to reach a 2% inflation in 2016. This target was first set in 2013, at the beginning of QE, but was never achieved. Later in the week, BoJ announced the country edged back from deflation, as its core consumer price index rose by 0.2% for the first time in over one year. Unemployment fell to 3.4%, accordingly to the Phillips curve for the short run.
Analytics suggest that the success of the Japan’s inflationary politic will depend on the oil price over the next year.
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