A volatile week for equities that ended with most of the developed markets finishing roughly where they started. At the beginning of the week, investors focused on the earnings, as many of the global US companies were due to report. As the week developed, the focus moved to the number of deals in the pharmaceutical sector. The end of the week was dominated by the increased tensions in the Ukraine. The continued uncertainty attracted investment in bonds as treasury yields fell, along with German Bunds. The oil price rose on the week as tensions increased over Ukraine; the Brent oil price closed the week at $110, towards the top end of its recent trading range. Any further rise in the oil price could well cause further volatility in the equity market. The Vix rose modestly over the week.
The hunt for yield continues as Saturday’s Financial Times points out that the demand for “junk bonds”, in their words, hits “fever pitch”. Numericable, a French telecoms company with a credit rating of ba3 (this rating is considered speculative and not investment grade), and its parent group Altice raised $21bn in total by issuing junk rated bonds paying between 4.875% and 6.25%. However, there was nearly $100bn demand in capital for the bonds, almost 5-times cover for the issuance.
With nearly half the S&P 500 companies reporting, according to Factset over 73% have reported earnings above the mean estimate, but only 53% have reported sales above the mean estimate. That would continue to suggest that companies are managing to eek out efficiency gains to meet earnings estimates, as sales growth continues to struggle in the low economic growth environment. Earnings guidance looks a little weak as 36 companies have issued negative earnings guidance and 15 companies have issued positive earnings guidance. Some of the notable companies that contributed to earnings upside surprises in the past week were Apple, Microsoft, General Motors and Facebook.
The upcoming week will see on Wednesday the release of the US Q1 GDP. A deceleration is expected in economic activity after the effects of the tough winter. Later in the day we get the Federal Reserve interest rate decision, no change is expected to interest rates, but the belief is that the bond purchase program will be tapered by another $10bn.
It is a busy week in Europe for macroeconomics, ahead of the ECB rate meeting on the 8th of May. Tuesday sees the release of Consumer and business confidence, along with industrial and economic sentiment. On Wednesday we see core year-on-year inflation data for the region, and on Thursday the release of the unemployment rate. Expectations are for the unemployment rate to remain close to 12%, and the inflation rate year-on-year to remain at 0.5%. In our view, if these reports come in line with expectations the ECB will not wait until June to lower rates but will move at the next meeting.
As “sell in May and go away” approaches equity markets continue to mark time from the start of the year. This era of consolidation may continue as investors wait to see signs that earnings growth meet expectations, confirmation that global economies are on a sustainable path to recovery and that a solution will be found to the troubles in the Ukraine.