27.04.12 Friday Morning

There have been various factors causing a drag on European equities this week preventing Europe from riding on the coattails of impressive US earnings. Most governmental elections cause a stir in the markets so when President Sarkozy was defeated in the first round of the French Presidential Elections investors became concerned about the uncertainty and the potential instability for this key European economy. This manifested in risk asset declines on Monday.
 
The sell-off was exacerbated by political chaos regarding the Dutch government’s finances and really disappointing manufacturing and services data across the Euro-zone. The Netherlands are one of only four countries in the Eurozone left with the coveted triple A credit rating meaning any downgrade could have significant consequences on the rescue fund, aka the EFSF, and its appeal to investors. Moreover there can ill afford to be any concerns over the robustness of the EFSF as Spain could be now on a slippery slope after they were downgraded two notches by the S&P credit rating agency. Spain sold 3 month and 6 month bonds on Tuesday that were in relatively high demand although it begs the question as to how much real demand there actually is as reports indicate many Spanish banks are being encouraged to use the ECB's 3 year loans to buy Spanish government debt. Despite the high demand Spain's troubled finances couldn't prevent their borrowing costs doubling compared to the previous auction of the same maturities. This trend cannot continue otherwise the Euro break-up scenario will be firmly back on the table.

Another blow for economic growth came in the form of a 0.2% fall in the UK's GDP on Wednesday which signalled a technical recession defined by two consecutive quarters of economic contraction. Much of this was already priced in as the effects of the economic slump in Europe on the UK are being felt by businesses all across the land.

Across the Atlantic equities have made bigger gains mainly driven by a continuation of better-than-expected quarterly results from US firms. Over 70% of S&P 500 companies that have reported so far have beaten analyst forecasts, which has been a huge catalyst for equities against a worldwide backdrop of sluggish economic growth. In spite of the earnings figures investors should remind themselves that the bar has been set rather low for earnings estimates making it relatively easy for firms to deliver welcoming results. Boeing and Caterpillar were amongst the big names posting significant rises in quarterly profit, 58% and 29% respectively, and beating forecasts.
 
But the most valuable company in the world, Apple, managed to take the limelight again as it reported a 94% rise in profits boosted with sales of its iPhone and iPad in China.  The FOMC staged a press conference Wednesday afternoon which had a positive impact as Bernanke explained he would instigate further monetary stimulus if progress in the economy faltered. There are inflationary concerns amongst members of the FOMC, due to the elevated oil prices, who believe interest rates will have to be raised before the provisionally scheduled end of 2014. Although in reality not a lot has changed as the Fed is waiting to see whether the economy will stay on track before taking further action. Nonetheless Ben Bernanke's comments weakened the dollar and pushed GBP/USD higher. EUR/USD also rose to a lesser extent but any bulls on these markets should be aware that the dollar could quickly turn to being a safe haven asset once again if the Euro debt saga intensifies.

The US weekly jobless claims have been confusing lately due to a number of revisions but it is clear there has definitely been a blip in progress as the number claims have been rising each week since the low of 348k achieved 5 weeks ago. Amid the dissatisfying economic data from both sides of the pond it was pleasing to see a significant improvement in US pending home sales, up 4.1% for March, which is further evidence that the housing market is stabilizing, with a possible bias to the upside, which should provide a strong platform for the US economy to continue improving. Equities moved cautiously higher Friday morning in anticipation of the first measure of GDP in the States which was lower than expected by nearly half a percent but didn't seem to worry investors as the markets held their ground.

In regards to specific equity news BHP Billiton, the world’s largest mining company, faces a $5bn charge on its recent shale gas acquisition jeopardising the future of CEO Marius Kloppers. Vodafone agreed a deal to takeover Cable & Wireless Worldwide at 38p per share and said the acquisition will lead to cost savings by not needing to lease so much fixed line capacity from companies such as BT, and added they will now be able to offer a wider range of services and tap into the fixed line services for multinationals. ARM Holdings, which designs microchips found in most mobile phones, has benefited from Apple's success as its quarterly net profit jumped 74% and Rolls Royce has been awarded another huge contract worth $598m with the US Department of Defense.

Overall this week has highlighted the resilience of the markets despite the headwinds of austerity, debt and economic growth and implies investors, due to being unable to find a satisfactory yield elsewhere, are choosing to buy stocks even though growth is slowing across the globe.

 

Looking ahead to next week, on Monday the main economic figures scheduled are German Retail Sales, US Personal Spending and a manufacturing PMI from the Chicago area. On Tuesday there is a French, German and Italian Bank Holiday, and manufacturing PMI's for the UK and US. China is releasing a manufacturing PMI early Wednesday morning, and later in the morning is the UK's construction PMI and US ADP Employment Change and Factory Orders in the afternoon. UK Services PMI is due Thursday morning and an ECB press conference is scheduled for 13:30 after the interest rate announcement at 12:45 and finally the all important Non-Farm Employment Change is at 13:30 on Friday.

See our Economic Diary here.