Michael Ford

Summary

• It has been a very positive earnings season in the US so far, although share price reaction during the week was mixed.
• Economic data released during the week was positive in the US, while showing signs of stabilisation in Europe.
• Next week is a busy week for data, with inflation and labour market releases the key focus.

Strategy review

A gain in our directional equity strategies was offset by a loss in our fixed income component, while real asset strategies and total return strategies (TRS) were flat.

Market and economic review

US earnings strong while price reaction mixed

It was a busy week for US earnings with 40% of market cap reporting. At the headline level it has been a very positive earnings season so far with EPS growth now standing at 23% versus pre-season expectations for 17%. Even after adjusting for the impact of tax reform (approximately +7%), this represents an acceleration from last year’s growth of 12%. The proportion of companies beating expectations has also been high, currently standing at 80%, however market reaction has been mixed to say the least. This is perhaps best illustrated by Caterpillar, which is generally viewed as a proxy for global growth. The firm beat expectations and raised guidance for 2018, and the share price rose 4% on initial release of the results. However during a call with executives, the statement that this quarter was a “high watermark for the year” caused a quick shift in sentiment. The stock fell to close down -6%. Contagion spread on Tuesday to other industrial names, with the sector falling -2.8% and dragging the wider US market down with it.

That being said, there were more positive reactions in the second half of the week with Facebook and Amazon both gaining 9% and 8% respectively on strong earnings and revenue beats. The net result was that the S&P 500 Index ended the week flat after trading in a 3% range, providing further evidence that we have moved into a higher volatility regime. This type of trading environment is particularly attractive for our TRS component, and we continue to add selectively when the volatility dynamic provides opportunities.

Economic data was positive in the US, while showing signs of stabilisation in Europe

US data released this week has remained resilient, subduing concerns about a potential rollover in growth. The April provisional PMIs were above expectations, with the headline composite index increasing to 54.8 from 54.2. US consumer confidence also bounced in April at 128.7 (compared with 127 expected), keeping it close to cycle highs, while new home sales rebounded 4% in March (compared with 1.9% expected) and house price inflation rose in February (+6.8% year-on-year). The US GDP print for Q1 was 2.3% (annualised), representing a decent beat on expectations, although this does illustrate a cooling down from Q4 2-17 growth of 2.9%.

Data released in Europe showed signs of stabilisation. Provisional PMIs remain in expansionary territory with some signs of moderation from earlier in the year. The composite print of 55.2 for April was unchanged relative to March, but a small beat on the consensus estimate of 54.8. The German IFO survey continued to slide from its record highs, the headline business climate index fell to 102.1 from 103.2 in March and below the consensus of 102.8.

Treasuries break through 3%; USD fights back

In the US, the 10-year treasury yield edged over the psychological 3% level for the first time since January 2014 (having broken out of its recent range last week), before modestly retracing. US bonds notably underperformed their developed market peers. A lot of market commentary has been focused on a yield level where higher rates will become a negative drag for equities. However we believe that more important factors are both the rate of change in yields and the reason behind any increase. The Federal Reserve (Fed) is hiking due to a growing economy, while inflation remains benign, and yield moves thus far have been gradual, so we see no imminent concern for equity markets. The trade-weighted US dollar (USD) increased for the second week in a row (+1.5% on the week), with emerging market currencies the hardest hit.

ECB and BOJ provide little new information

There was little anticipation ahead of central bank meetings this week and they certainly lived up to this (lack of) hype. In Europe, the European Central Bank (ECB) meeting offered little insight as to the likely path of monetary policy for the second half of the year. ECB President Mario Draghi appeared to play down concerns related to recent disappointments in economic indicators, emphasising that data still remains historically strong. Having increased in line with US treasuries earlier in the week, bund yields fell following the meeting to end the week modestly lower. The Bank of Japan (BoJ) also met where the vote remained at 8-1 to keep rates unchanged, with Mr Kataoka remaining the lone dissenter.

Outlook

Busy week for data, with inflation and labour market releases the key focus

It is a busy week for US data starting on Monday with the Fed’s preferred measure for inflation, the PCE core and deflator readings, which are expected to be boosted by base effects. The April ISM manufacturing released on Tuesday is a particularly important indicator for growth momentum and the expected reading of 58.5 would indicate an economy still in a strong expansionary stage of the economic cycle. The Fed meet on Wednesday, although we expect that this will be a non-event given market pricing on the probability of a hike is only at 5%, and there will be no press conference by Jerome Powell. Of more importance for bond markets on that day will likely be the US Treasury announcement of debt issuance, where heavy supply is expected. Finally, on Friday we have the April employment report where consensus expects a 185k nonfarm payroll print and average hourly earnings at +0.2% month-on-month.

It is also busy in Europe where on Wednesday we get the preliminary reading for Q1 GDP for the euro area. This will be a key focus for the market given the recent softness in European data, however the number may be distorted due to weather. Consensus is expecting +0.4% year-on-year growth. We also get the April report for euro area CPI on Thursday with consensus expecting a +0.9% year-on-year print for the core, having held at +1.0% year-on-year for the last three months. In Asia the most significant releases will be the China PMIs (both official and Caixin), which are both are expected to nudge down slightly from last month.

Finally, we expect the earnings season to remain a key driver for equity markets. In the US, around 15% of market cap is reporting, with Apple the standout on Tuesday. There are also 55 Stoxx 600 companies reporting in Europe, where results so far have been much softer than in the US.

By Michael Ford, Portfolio Manager, Multi-Asset Strategy Group

The post Global macroeconomic commentary for the week ahead (week beginning 30 April 2018) appeared first on AdviserVoice.