Global markets weekly update

29.04.2024

U.S.

  • The major U.S. indices posted big weekly gains and managed to break a string of three weekly losses as strong earnings from technology companies helped counterweigh disappointment over the latest economic and inflation reports. The NASDAQ ended more than 4% higher for the week while the S&P 500 was up nearly 3%; the Dow lagged, posting only a slight gain.
  • Last week was the busiest of the earnings season, with about 1/3 of the S&P 500 companies reporting earnings, encompassing 40% of the index’s market capitalization. Results have been positive, with roughly 80% of the companies surprising to the upside and exceeding earnings expectations by 10%. Given their whopping contribution to the index earnings, the attention was on the “Magnificent Seven”. Three of the four companies from the group that reported results last week moved higher (Tesla, Alphabet, Microsoft). Shares of Alphabet surged after the company exceeded estimates and announced a dividend for the first time. But shares of Meta fell sharply, as the company delivered a lighter-than-expected revenue forecast while targeting heavy capital spending to support AI and other new technologies.
  • U.S. economic growth slowed considerably in the first quarter and fell short of most economists’ forecasts (2.5%). GDP grew at an annualized rate of 1.6%, down from 3.4% for the Q4. The fault can be attributed to a sharp slowdown in governmentspending and a widening trade deficit, but consumers also continued to restrain their spending, particularly on goods.
  • Inflation data released on Friday, ahead to the U.S. Fed meeting, also seemed to concern investors and raise worries of the U.S. economy surrendering to stagflation, or resilient inflation alongside weakening growth. The Personal Consumption Expenditures Price Index, The Fed’s preferred gauge for tracking inflation, rose at a 2.8% annual rate in March (excluding food and energy prices), unchanged from February’s core inflation figure, and well above policymakers’ 2% long-term target rate. While at the start of the year investors had expected as many as six 25 bps cuts this year, they now expect one or two. And a minority of traders is now even betting on Fed rate rises in the next 12 months. The Fed’s fight against resurgent inflation in the U.S. will probably complicate other central banks’ loosening plans, notably for the ECB and the BoE. If these other regions cut rates more aggressively than the Fed, they risk harming their own economies because of the impact of exchange rates, import costs and inflation.

  • The recent trend of higher-than-expected inflation numbers appears to be weighing on U.S. consumers, as the University of Michigan’s revised gauge of consumer sentiment in April fell back from a nearly three-year high in March.
  • Yields of U.S. government bonds rose for the fourth week in a row, and the yield of the 2-year Treasury briefly eclipsed 5.00% on Thursday for the first time since last November. The yield of the 10-year bond finished the week around 4.67%.

Europe

  • The Eurostoxx 600 ended the week 1.74% higher amid easing tensions in the Middle East and some reassuring corporate earnings results. Germany’s DAX gained 2.39%, France’s CAC 40 Index added 0.82%, and Italy’s FTSE MIB climbed 0.97%. The UK’s FTSE 100 Index climbed to fresh all-time highs, adding 3.09%.
  • ECB policymakers are still sticking with a June rate cut, barring unexpected economic shocks. However, some ECB hawks have casted doubt on subsequent reduction in rates. German Bundeskbank President Joachim Nagel said in a speech that a decision in June “would not necessarily be followed by a series of rate cuts” given the current uncertainty.
  • Business activity in the eurozone grew at the fastest pace in nearly a year in April, driven by a recovery in the services industry. A first estimate of the Eurozone Composite PMI, which includes the services and manufacturing sectors, came in at 51.4, up from 50.3 in March and above forecasts of 50.7.
  • Germany’s PMI and the Ifo Institute’s barometer of business confidence provided further evidence that the country’s economic downturn may be bottoming out. The private sector returned to growth in April, as services activity increased and a decline in manufacturing eased. Overall business sentiment improved for a third consecutive month, and the government increased its forecast for economic growth this year to 0.3% from 0.2%.
  • Business activity in the UK grew at the fastest pace in almost a year, with the composite PMI rising to 54.0 from 52.8 in March.

Japan

  • Japanese stocks gained over the week with both the Nikkei 225 and the broader TOPIX Index up 2.3%. The Bank of Japan refrained from making changes to its monetary policy at its April meeting, which was perceived as broadly dovish by investors. The authorities also refrained from intervening in the currency markets to prop up the historically weak yen, despite intense speculation about the growing probability of such action. The yen weakened to JPY 156.8 against the USD.

China

  • Chinese equities rose during the week as investors grew more optimistic about the economy. The Shanghai Composite Index gained 0.76%, while the blue chip CSI 300 added 1.2%.
  • China’s GDP expanded an above-consensus 5.3% in the first quarter from a year ago, accelerating slightly from the 5.2% growth in last year’s fourth quarter. China’s economy is expected to grow 4.8% this year, up from a median forecast of 4.6% last month.
  • However, economists downgraded their inflation forecasts as declining producer prices and a persistent property market slump remain a drag on the economy.

Portfolio considerations

Fixed Income

We maintain our overweight in fixed income, as the asset class is supported by a combination of historically attractive yields and the prospect of rate cuts. The latest inflation data certainly complicates the Fed plans to cut rates but doesn’t eliminate the Fed’s bias to ease policy once a string of reassuring inflation readings is observed. A sharp rally in bonds is unlikely until the Fed starts cutting rates, but we believe the potential upside is greater than the downside. We still find it judicious to lock-in today’s historically high yields (even more so after last weeks’ interest rates rise) by increasing duration. This holds true for buy-and-hold investors as well as for those seeking absolute returns. The belly of the curve (5-6y) offers the best risk-adjusted return as it allows investors to limit reinvestment risk and to benefit from future rate cuts, while not taking excessive duration risk.

Equities

We maintain our cautiously positive outlook for the year based on resilient economic growth, a reacceleration in corporate profits, and the Fed’s bias to ease monetary policy. We recommend using periodic bouts of volatility to diversify into segments of the market that have lagged, rebalance, and add quality names to the portfolio.

Global Markets weekly update

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