The S&P 500 and the Nasdaq closed at record highs last Tuesday after a clutch of better-than-expected earnings reports eased concerns about a broad slowdown. Markets have continued to push higher all thanks to the change in tone from the central banks despite the lack of compelling economic data. But the ongoing corporate earnings season is helping the positive mood, with 75 per cent of US companies beating consensus expectations on earnings. Whilst earnings have appeared to be strong, sales have missed expectations in around half of the companies that have reported so far. Expectations for earnings for the rest of the year still look very optimistic. Arguably we need to see a stabilisation or pickup in the data to justify these assumptions.
The Bank of Japan pledge to hold rates at zero until spring 2020, although it is of no surprise as no one is expecting a rate rise any time soon given where inflation lies. However, it shows the concerns that exist by policymakers over slowing growth and lack of inflation within their economy.
The US economy grew at a faster rate than expected in the first quarter and posted its best growth to start a year in four years. First-quarter GDP expanded 3.2 per cent, ahead of expectations of 2.5 per cent. It was the first time since 2015 that first-quarter GDP topped 3 per cent. Markets are still pricing in a 56% chance of a Fed rate cut this year; the bullish view of the equity market on the economic and earnings outlook does not seem consistent with a need for the Fed to cut rates. Indeed, if equity markets are right, then a rate hike still looks more likely than a cut.
US President Donald Trump decided to end exemptions from sanctions for countries still buying oil from Iran. The White House said waivers for China, India, Japan, South Korea and Turkey would expire in May, after which they could face US sanctions themselves. This decision is intended to bring Iran’s oil exports to zero, denying the government its main source of revenue, but it could tighten oil markets and send prices higher. Figures released over the weekend showed Chinese industrial profits returned to growth in March, rising 13.9 per cent year on year, following four consecutive months of falls. A lot of parallels are being drawn with 2015/16 when China stimulated their economy, their stock market rallied, and the growth fed through to the rest of the world. Markets in 2015/16 didn’t really take off until the data had picked up; this time, the market has front-run the data with a very strong rally since Christmas
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