Earnings and economic data become increasingly influential
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Apr. 15, 2019
Stocks rose for the second straight week to begin the second quarter, although the gains were more muted. The MSCI All Country index climbed 0.4 percent after rising 2.1 percent the previous week, and the S&P 500 added 0.5 percent after also posting a 2.1 percent gain the previous week. In the process, the S&P crossed back above the 2900 level and now sits less than one percent below its all-time high of last September. All of the gains came on Friday as JP Morgan Chase began earnings season with a far better than expected result. Despite an array of headwinds facing the banking industry, including low rates and a flat yield curve, sluggish trading volume and soft loan growth, JP Morgan nevertheless produced a solid quarter that contributed to the rising sense of optimism among investors.
That optimism was tempered, however, by weakness elsewhere. In China, the Shanghai Composite index slipped 1.8 percent. China reported a sharp increase in its trade surplus in March, as exports surged and imports plunged. However, concerns over slumping domestic demand were somewhat assuaged by a sizeable increase in credit, as policy stimulus seems to be gaining some traction. The German DAX, whose fortunes are seen as increasingly tied to activity in China, also fell slightly, losing 0.1 percent. Flaring trade tensions between the European Union (EU) and the U.S. last week over aviation subsidies didn’t help, and once again raised the specter of tariffs on EU auto exports. The FTSE 100 also edged lower, as the UK agreed to another Brexit delay.
Is it too early to celebrate earnings success?
The celebratory mood that accompanied JP Morgan Chase’s earnings announcement may yet prove to be somewhat premature. There seems to be a sense that second quarter earnings expectations have become so pervasively poor that aggregate results will almost assuredly exceed those diminished expectations. And that may certainly happen. Actual results typically exceed expectations.
But there is a long way to go before we will know whether that optimism is warranted. At the same time, while various sentiment surveys are currently elevated, they are not at extremes. The same is generally true of valuations. On the other hand, the VIX index of expected volatility fell to levels last seen just prior to the fourth quarter selloff, perhaps reflecting a sense of complacency.
Bond yields on the rise; Investors watching earnings and economic data
Bond yields rose sharply last week, reflecting the view that global growth has bottomed and is beginning to improve. The ten-year Treasury note yield surged higher by ten basis points over the course of Thursday and Friday, closing at 2.57 percent, its highest level in three weeks, and the yield curve steepened slightly. High yield spreads continued to contract as well, reaching their tightest level to government notes since early November, and as with stocks, almost now completely reversing the widening that began at the start of the fourth quarter. Bond yields in Germany ended the week in positive territory after spending most of the previous three weeks below zero.
While we await further developments on the trade front, both earnings and the economic calendar become increasingly influential. In the U.S. this week scheduled reports include industrial production, retail sales, flash manufacturing, leading indicators, and housing starts and permits. Closely watched will be reports from China including industrial production, retail sales, and first quarter GDP, which is expected to slow to 6.3 percent year-over-year. The advance estimate of U.S. GDP is scheduled for April 26. with a Bloomberg consensus expectation of 1.6 percent currently. From the Eurozone we will see flash manufacturing, and consumer prices, as well as flash manufacturing from Germany in particular.
On the earnings front this week, activity ramps sharply higher. Scheduled to reports include Goldman Sachs, Citigroup, Bank of America, Morgan Stanley, IBM, Johnson & Johnson and Netflix among many others