Following the “perfect week” of the S&P500, where the index set every day a new positive record, this week the market was characterized by oscillating returns due to the quarterly earnings release. Indeed, even if the majority of reports indicated strong earnings, especially in some of the largest US companies, others, for example in the automotive sector, showed figures below expectations. In particular, the S&P500 closed at 2581.07 with a weekly gain of 0.228%.
Furthermore, the market is still on hold waiting for president Trump to unveil his nominee for the next FED chair. Currently the major candidate is John Taylor, known for its strong hawkish view on the interest rates which, in his opinion, have been “too low for too long” considering the overall economic environment. As a result, investors consider more likely a more aggressive hiking rate schedule in the future and thus they keep adjusting their portfolio for rising rates rather than falling ones. In particular, US Treasuries remained under pressure, with the yield on the benchmark 10-year paper briefly topping 2.47% for the first time in seven months on Tuesday.
In addition, a shift in the likelihood of more hawkish future interest rate rise positively affected the dollar. In fact, the Euro/USD closed at 1.160 with a weekly change of -1.86% that reflects partly an appreciation of the dollar, but also a depreciation of the Euro after ECB’s conference on Thursday. Indeed, the dollar index, which reflects the performance of the dollar against its major peers was at a level of 94.916 on Friday, representing a weekly gain of 1.30%.
Next week could be pivotal for markets as Trump could make the official announcement of his nominee for the FED chair and the congress will unveil its tax legislation. Indeed, both the dollar index and the Russell 2000 index, which tracks the small-cap stocks, are likely to be affected by a tax reform different from expectations.
On Thursday, ECB president Mario Draghi announced that the QE will continue until the end of September 2018, but the bond purchase will decrease to €30 bn per month starting from January. The central bank is moving cautiously and does not exclude to change the program if needed.
After increasing tensions, in Spain decisions had been made. On Friday 27th, Catalan parliament declared independence from the central government in Madrid. This puts Mariano Rajoy’s suggested impeachment of the head of Catalan government Carles Puidgmont in a new light. The European Commission spokesperson Mina Andreewa refused to comment the newly arisen situation. Last Sunday, Czech election saw the anti-establishment Andrej Babis, former businessman and minister of finance, winning three times the votes of his major opponents.
Despite the events in Spain, markets remained calm and Euro Stoxx 50 increased to 3,652.23 (+1.31% week-on-week) over steady 3600-point region coming very close to the two-years-high of 3659 points. German DAX closed the week at 13,217.54 (+1.74% over the week) and continues march for the new all-time maxima. Following its foreign equivalents, CAC 40 also established new peak at 5494.13 (+2.27% week to week). The FTSE MIB placed itself with the same growing trend and ended week with a 1.42% increase, closing at 22,665.03. Those movements can be attributed to positive information from Euro Area, specifically the Consumers and Business Confidence (in line with forecasts) and stability after ECB announcing continuation of 0% interest rate. Only the IBEX 35, being directly influenced by national instability, remained relatively neutral with subtle decrease of 0.02% from last week’s closing.
European bonds market remains stable with respect of general mild optimism. German 10Y bond yield decreased by 0.069 pp week-over-week to reach 0.383% at the end of Fridays session. Interestingly, Spanish 10Y bond yield seems to be rather indistinctly correlated with current political events and closed the week on 1.586% (-7.7 bps week-over-week).
Next week data about Europe unemployment rate for September, GDP growth rate YoY for Q3 and CPI YoY for October will be released on Tuesday 31. Forecasts are respectively: 9%, 2.1%, 1.4%.
The blue-chip FTSE 100 ended almost flat, declining 0.24% over the week and closing at 7505.03. The most important driver of UK markets this week has been GDP data released on Wednesday. The data compiled by the Office for National Statistics showed that the UK economy grew in the third quarter above expectations at 0.4% (consensus 0.3%), up from 0.3% in the second quarter. On an annual basis, the UK economy is growing at 1.5%, proving resilient despite political uncertainty surrounding Brexit. Strong GDP data seem to anticipate that the Bank of England will hike interest rates at its meeting next week (in its minutes of the September meeting, the Monetary Policy Committee gave the strongest signal yet that it intends to raise interest rates from a record low of 0.25%). The Bank of England undertook an emergency interest rate cut in August 2016, just after Brexit. The encouraging data suggest that the stimulus could be removed soon.
The bond market reacted with yields rising to their highest levels since the Brexit vote. The 2-year Gilt yield, the most sensitive to monetary policy shifts, topped 0.51% on Wednesday and closed the week at 0.46%. The same path was followed by the 10-year Gilt yield, climbing to 1.40% on Wednesday to close lower at 1.35% on Friday.The pound ended the week weaker with respect to the US dollar at GBP-USD 1.3128.
Next week, the Bank of England will deliver its monetary policy decisions on Thursday. The market is pricing in a hike of the key-policy rate to 0.50%, while the asset purchase program is expected to stay unchanged at £435 bn.
Rest of the World
Japan’s Nikkei 225 closed at 22,008.45 on Friday recording a 21-year high, after it surged by 2.57% on a weekly basis. Topix closed at all-time highs as well at 1,771.05, gaining 2.33% over the week. The Shanghai Composite Index closed at all-time highs at 3,416.813 after gaining 1,13% on a weekly basis. The Hang Seng Index was trading in negative territories during the week, but managed to cover its losses after Mario Draghi’s statement and closed the week neutrally at 28,438.85 (-0.17% over the week). Overall, it was a good week for Asian markets as most of the indexes recorded new highs following the outstanding US tech companies’ earnings session and ECB’s speech.
The Yen weakened about 0.13% against the US dollar week-on-week, closing at ¥113,67 week-on-week. The Australian dollar reached a 3-month low against the US dollar on Thursday and closed at $0.7677 on Friday, losing 1.79% week-on-week. The Euro lost almost 1,35% against the Yen over the week following the ECB’s announcement, closing at ¥131,97 on Friday.
Oil prices surged this week on growing expectations that OPEC will agree on extending output cuts beyond March 2018. Crude closed at $54,19 per barrel on Friday, the highest level since March, after it gained 4% in the week. Brent closed at $60,58 per barrel posting 4,62% weekly profits. Gold closed at $1,274 per ounce on Friday after it lost 0,5% over the week.