A decent month for equity investors ended on a disappointing note as the final week of April saw the developed markets of Europe, the UK and America all finished the week lower. Despite this, the main focus in the past week has been less with equities and more to do with the US dollar and bond markets. The US dollar at one stage had fallen to a 2 month low against the euro, as 10-year treasury yields rose to their highest levels for 2 months. European bond yields likewise gave ground in the past few days; 10-year German bund yields had fallen within 5bp of zero, rose to close the week above 40bp.
Journalists put Greece on the back burner after the much weaker than expected US GDP number reignited concerns on the strength of the US economy. The Federal Reserve kept interest rates where they were, to no ones surprise, whilst acknowledging the weak number they continue to expect the US economy to grow at a moderate pace.
US Equity prices and capital flows continue to diverge. US equity prices, despite last week’s correction remain close to all time highs, in spite of US equities having seen net out flows in 10 of the past 11 weeks. Equities overall has seen net outflows in 5 of the past 6 weeks. Despite this week’s selloff in treasuries, bonds still attract investors; investment grade bond funds have now seen 71 straight weeks of inflows. If we had seen this in equity markets, one would imagine it would be giving technical analysts some cause for concern. To support this view The Financial Times quoted a JP Morgan fund manager who described the recent reversals as a technical correction in overcrowded trades.
The earnings season is beginning to draw to a close particularly in the US as nearly 80% of the S&P 500 companies have now reported earnings. Expectations were for negative earnings growth in the quarter but according to Merrill Lynch earnings growth year on year will be 0.9%. For European companies this (again according to Merrill) is shaping up to be the best quarter since Q3 2010.
UK investors in particular will focus on the election on Thursday. So far into what could be a very messy outcome, bonds, equities and the pound have remained relatively stable. Even after last week’s selloff in UK equities, the FTSE 100 remains close to the 7000 mark. Gilt yields have risen, but not dramatically and more in line with the recent rise in US treasury yields. The ten-year gilt currently yields 1.89%. The value of sterling on a trade weighted basis remains close to where it has been over the past year. With only a few days of polling to go, the bookmakers continue to predict a hung parliament, with the Conservatives winning the most seats.
After last weeks GDP report eyes will once again be on the US macro data, and there is plenty to focus on as we get a combination of employment, manufacturing and trade data. It’s a busy week in Europe, later today we get the latest European Commission Growth Forecasts; there will be some expectations for growth forecasts to be raised. On Wednesday the ECB Governing Council meets, one would imagine the topic of Greece would be high on the agenda.