Markets have been relatively subdued this week, despite a convincing win by Emmanuel Macron in the French Presidential election, with investors having widely anticipated the result and positioned themselves accordingly. The Euro, which had been expected to strengthen on the result, fell back after the briefest of rallies, now trading at $1.08 dollars to the euro. European stocks, which had performed so strongly after the first-round result, gave back some of their gains as investors took profits, with the Eurostoxx 50 index falling 1.7% over the week as of 12pm London time on Friday.
The US stock market also failed to make further headway despite encouraging first quarter company results, not helped by the shock sacking of James Comey, chief of the Federal Bureau of Investigation (FBI) by President Trump. Just when investors’ confidence was growing in Trump’s ability to navigate his way around Congress, as the repeal of Obamacare was successfully passed in the House of Representatives on the 2nd attempt, this bombshell was dropped. The initial reason cited was a lack of confidence in Comey, triggered by the investigation into Hillary Clinton’s emails in the run up to the presidential election. However, as the week progressed, the President let slip that Comey’s continued investigation into the Trump camp’s connections with Russia had been the real driver. This combined with rising producer prices data, and lower jobless claims, led to investors becoming more cautious, as the S&P 500 failed to break through 2,400, falling 0.2% over the week to the close on Thursday.
UK equities fared relatively well over the week, with the FTSE All Share rising 1.2%, as sterling fell back, having tested the $1.30 level mid-week, before falling to $1.28, boosting sterling reported revenues generated from overseas earnings.
The Bank of England kept rates on hold at their latest interest rate setting meeting, with only one member of the committee dissenting. The tone of their statement was upbeat and suggested that rates might need to tighten somewhat greater than that implied by markets, should Brexit negotiations go smoothly.
However, markets were somewhat sceptical, especially as the statement coincided with unexpectedly weak UK industrial production data, as manufacturing production declined by 0.6% in March. Industrial production accounts for around 15% of the UK’s economic output, but despite the fall in March, it is still 1.4% higher than it was 12 months ago.
The Japanese Topix index rallied 2% over the week as it played catch up having been closed for 3 days of public holidays last week. It was further supported by the Yen weakening versus the dollar to Y113.8. Emerging markets also had a positive week, rising 2.3%, as the dollar index broke its recent run up and concerns over US protectionism were increasingly put on the back burner.
Shares in Australia’s “big four banks” were hit, after the Federal Budget on Tuesday announced a new tax on balance sheet liabilities, hoping to raise an estimated A$6.2bn (US$4.6bn) over four years. The annual 0.06% levy will apply from the 1st of July to deposit taking institutions with liabilities of more than $100bn.
Elsewhere, mining and energy stocks recovered throughout the week as commodity prices stabilised, helping the S&P/ASX 200 to finish flat over the week at 5836.9.
Government bonds started the week selling off, as market expectations for a US rate rise in June rose to 87% as implied by futures markets and investors’ expectations for the European Central Bank (ECB) to taper its quantitative easing programme early hardened. However, as the week progressed, investors increasingly became cautious and Mario Draghi, president of the ECB, defended his ultra-loose monetary strategy in comments made to the Dutch parliament; bonds rallied with yields compressing back down. It is worth noting, that despite the unexpected strength in government bonds this year, 10 year US Treasuries have only returned 1.5%, 10 year UK gilts 1.3%, whilst 10 year German bunds have lost 3.6% for investors.
Brent crude oil climbed back above $50 this week as the latest report from the US Energy Information Administration showed stockpiles of crude oil in the US fell for the 5th straight week, falling by 2.5m barrels
After the French presidential elections, markets are now free from political concerns until the German elections in September, or of greater concern the Italian elections, which in all likelihood will be held in early 2018. Therefore, for once markets will likely focus on company fundamentals. Company reporting for the first quarter has so far been very positive, and have gone a long way towards justifying the rise in markets this year. However, that does not mean equities are cheap. Investors will need continued evidence of an improving picture for markets to make further headway, with expectations rising for President Trump to deliver on some of his election pledges.
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