This week, US equities ended on a low note as the market kept a close watch on rising UST yields and Apple was a drag on the tech sector. The benchmark 10-year yield rose to its highest level in four years. The three major equity indices still managed to finish higher for the week, ahead of busy week of earnings.
US equities started the week on a strong note, largely driven by strong earnings releases and easing of concerns over global trade and the Syrian crisis. A strong performance by the Tech and Energy sector drove much of the initial rise. Within Tech, Netflix, driven by its well-received quarterly results, was the obvious outperformer. The other sectorial driver was Energy, buoyed by oil prices hitting fresh highs. The Dow, however, was dragged down significantly by IBM shares falling more than 7% on news of falling margins for the company.
During the latter part of the week, focus for US equities shifted to rising US yields, dominating the effect of renewed advances in oil prices. The rise in both short and long end yields seemed to be driven by an overall improvement in risk sentiment due to higher oil prices, stronger US earnings and muted geopolitical concerns. All of this seems to instil confidence in the Fed hiking 3 or 4 times this year – the probability of 4 rate hikes, for instance, rose to its highest level in 2018. Of note was the steeping of the US yield curve, after a long period of flattening. Rising yields also supported the USD during the end of the week. However, it’s important to note that the USD, off late, hasn’t been driven substantially by yield differentials.
Equities were dragged down by Tech during the end of the week, Apple being the main culprit. Taiwan Semiconductor Manufacturing, one of the iPhone maker’s biggest suppliers, warned on Thursday of “weak demand” from the mobile phone sector, heightening concerns about a slowdown in smartphone sales.
Key moves for the week were:
- S&P rising 0.5%
- Dow gaining 0.4%
- Nasdaq advancing 0.6%
- 10yr UST Yield ended at 2.96%
- DXY was up 0.6%
DAX closed on Friday at 12,540.50 recording a positive performance of +0.78% over a week ago, CAC 40 registered a +1.84% WoW increase, ending the week at 5,412.83 while the overall European index, that is, Eurostoxx50 closed at 3,494.20 reporting a weekly performance of +1.34%. Italy’s FTSE MIB gained 2.14% WoW closing at 23,829.34.
In the fixed income space, German 10Y Bund currently yields 0.59% versus last Friday’s 0.51%, French 10Y Treasury Bonds (OAT) Yield increased a bit to 0.81% from last week 0.74% while Italian equivalent is trading at 1.78%, two basis points below last week’s 1.80%.
After a bit of volatility during which the European currency crossed the level of 1.24$, EURUSD came back almost unchanged since last Friday with 1 Euro equal to 1.2288 USD while the European currency appreciated vis a vis CHF to 1.1981, up from week-beginning value of 1.1866.
Next week most important data to be released are the April’s PMI Indexes (both Manufacturing and Services) on Monday at 10:00, the German IFO index on business confidence on Tuesday (10:00), on Thursday after the ECB meeting the usual press release (with Q&A) will be held at 13:45 (expect no changes in the conduct of the ECB monetary policy but keep an eye on any QE-end related communication) whilst on Friday data will be released on annual and Q1-GDP in France and Spain. The very same day the German labour report will be published.
The week ending on the 20th of April was particularly tough for the British Pound. In particular, retail sales figures and UK inflation data were well below expectations and there was a renewed concern about the potential impact on the Brexit process of a dispute over the UK’s land border with the Republic of Ireland. This string of disappointing news was furtherly exacerbated by the comments from the Bank of England’s Governor that cast doubt on the pace of interest rate rises. In particular, the market had already priced in an interest rate hike for the 10th of May but Mark Carney said in an interview with the BBC that, although several interest rate rises were “likely” over the next few years, softer economic data were giving the Bank of England pause for thought. Indeed, the consequence was a significant drop of the pound given that, even if the market still expects a hike for the 10th of May it adjusted downward the estimation for the future schedule of BOE tightening policy. In particular, the USD/GBP closed the week at 1.401 with a weakly loss of 1.58%.
The sharp fall of the UK pound has sparked a rally for government debt and London listed stocks given that earnings of UK firms in foreign currency are worth more and UK exports become much more competitive. Indeed, the FTSE100 closed the week at 7368.17 with a weekly gain of 1.43%, 10-year Gilt yield is down to 1.481% while two-year Gilt yield has fallen 9 bps to 0.83%
For the coming week, the market will possibly wait to have more information on the likelihood of the rate hike of the 10th of May. For this reason, it is important to check the upcoming UK GDP growth data (Q1, preliminary) which is expected to be 0.4% QoQ and 1.5% YoY, from 0.4% and 1.4% respectively
Rest of the World
China’s economy grew faster than expected in the first three months of 2018, driven by strong consumer demand and manufacturing. GDP expanded by 6.8% YoY, matching the previous quarter’s pace and exceeding the official target of 6.5%. Economic activity is expected to slow down in the coming months, however, as Beijing continues its de-risking campaign and as President Trump threatens more tariffs. The Hang Seng index fell 1.40%, while the Shanghai Composite index fell 2.58%.
The other main Asian equity indices:
- Japan’s Nikkei 225 closed 1.57% higher at 22,162.24.
- India’s Sensex 30 closed 1.39% higher at 34,415.58.
Brazil’s Bovespa index climbed 1.59% to 85,550.09, two weeks since former President Luiz Inácio Lula da Silva was taken into custody to start a 12-year prison sentence for corruption and money laundering. The market now expects that Lula will be unable to run for this year’s presidential election, leaving the Brazilian left-wing significantly weakened.
Brent Oil closed the week at 73.63 USD/barrel, up from 71.91. WTI Crude closed at 68.28, up from 67.22.
Gold spot price decreased to 1335.58 USD/oz from 1340.80.
The MSCI Emerging Market ETF and the MSCI Asia Pacific Index decreased 65 bps and increased 10 bps, respectively.