16 May 2017
Markets eased into April watchfully, still troubled by geo-political concerns in the Middle East and North Asia, and awaiting the first in-person meeting of US President Donald Trump and his Chinese counterpart Xi Jinping. Also weighing on investors’ minds at the onset of the month was the imminent French election, as well as the US jobs data on April 7 and the start of Wall Street’s first-quarter profit-reporting season.
North Korean tensions were clearly high on the agenda in the Trump-Xi meeting, but markets were also concerned about trade tensions between the two countries, and the potential for the leaders to disagree. The leaders took a step toward tackling the trade issue by agreeing at the meeting to a 100-day plan for trade talks aimed at boosting US exports and reducing China's trade surplus with the United States – although after the meeting, data revealed that this surplus surged to US$17.7 billion ($23.6 billion) in March from US$10.4 billion ($13.9 billion) in February.
Domestically, the US jobs number disappointed, with 98,000 jobs added in March, compared to a consensus forecast of 180,000, and employment in the two previous months being revised down by 38,000. The US unemployment rate fell from 4.7% to 4.5%.
The minutes of the March Federal Reserve meeting, released in April, showed that the Fed would like to reduce, or 'normalise', its US$4.5 trillion ($6 trillion) balance sheet, and end quantitative easing (QE) later this year, ceasing the reinvestment of assets worth US$425 billion ($567 billion). To the hawkish tone on interest rates, investors can add the notice from the Fed that the days of cheap money are over – and so are the happy days in the bond markets.
But the cost of money would not be rising if the US economy were not improving – although gross domestic product (GDP) rose in the first quarter by 0.7% at a seasonally adjusted annual rate, the Commerce Department said, falling well short of the 1% growth expected by economist’ consensus. Consumer spending, the largest component of the US economy, rose by just 0.3%, the worst performance since 2009.
The markets were heartened, however, by US wages and salaries rising by 0.8% during the first quarter, their fastest growth pace since 2007. Wage gains are seen as providing the support for consumer spending in the next few quarters. The Fed’s preferred inflation gauge also rose at a rate of 2.4% in the first quarter, its biggest jump since spring 2011. Tempering this was some disappointment at the lack of detail in President Trump’s tax plans, revealed on April 26.
Stock market valuations, although heightened, are still backed by the optimistic outlook for company earnings. According to data provider FactSett at the end of April, nearly 300 companies in the S&P 500 reported first-quarter earnings were on track to rise 12% from the previous year. That represented a more optimistic outlook than a month earlier, when analysts expected first-quarter earnings growth of 9.1%.
Record market highs continued to be racked up in April, with the Dow Jones Industrial Average gaining 1.34% for the month, the broader S&P 500 index rising 0.91% and the Nasdaq Composite Index adding 2.3%, as it punched through 6,000 points for the first time.
Earnings are also front-and-centre in Europe, where first-quarter earnings for the Euro STOXX 600 constituents are expected to increase 5.5% from the first quarter of 2016, according to Thomson Reuters data; while according to Bloomberg, analysts forecast a 10% profit lift for the blue-chip Euro STOXX 50 members in 2017.
Late in the month, numbers came through showing that economic confidence in the Eurozone had jumped to an almost 10-year high. And forward-looking purchasing managers’ index (PMI) data in Europe is running at a six-year high.
The improving view on Europe could also be seen in European equity funds, which recorded their strongest inflows in more than a year in April, according to EPFR Global data. The renewed confidence in Europe was driven not only by earnings but by relief over the outcome of the French first-round vote late in the month: markets saw the strong showing of centrist, pro-European Union candidate Emmanuel Macron in the first round as positive, given that Macron won more votes than both Marine Le Pen, who had pledged to take France out of the euro, and Jean-Luc Mélenchon, a far-left anti-globalist candidate.
These factors combined to send the Euro STOXX 600 index 2.5% higher for the month, powered by the surge in the CAC 40 in the wake of the first-round Presidential poll result: the Paris index was up 4.1% in the final week of April, hitting a nine-year high in the process. The CAC 40 gained 2.8% for the month, with the DAX in Germany up 1%. In London, the FTSE-100 index lost 1.6% in April, as British economic growth slowed in the March quarter to a one-year low of 0.3%, down from 0.7% in the last three months of 2016.
In Asia, Chinese economic growth rose to 6.9% in the first quarter, up from 6.8% in the previous quarter, and the fastest pace since the third quarter of 2015. First-quarter growth was largely driven by high levels of government investment in infrastructure and a recovery in exports, but Chinese markets remain volatile, as Beijing ramps up its regulatory initiatives and its determination to cool the country’s property markets and bank lending splurge.
The central authorities appear keen to ensure a smooth domestic backdrop to the 19th Communist Party Congress, scheduled for the (Chinese) autumn. Held every five years, the Congress is a major set-piece in the theatre of Chinese administration, and Beijing will not want any economic alarms to disrupt it.
Notwithstanding this, the regulatory crackdown unnerved investors, with the Shanghai Composite Index posting its worst performance for 2017 in April, losing 2.1%. In Hong Kong, the Hang Seng Index gained the same percentage.
In Japan, while the central bank’s 2% inflation target remains elusive, the domestic economy is slowly improving, with both the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) upgrading their outlooks for Japan's real growth. The IMF predicts the economy will grow by 1.2% this year, up 0.4 of a percentage point from the January estimate of 0.8%. On the stock market, the Nikkei index added 1.5% for the month.
At home, the S&P/ASX 200 Index was up just over 1% in April, despite weaker iron ore price hurting resources. The A$ slipped just under 2% against the US currency.