April 21, 2017
For the week ending 21 April 2017
- Tensions on Korean peninsula high
- UK’s May calls snap election
- US tax reform likely delayed
- Four seek to advance to French runoff election
- China’s growth picks up
Global equities were up for the week as investors focused on strong US corporate earnings and overlooked increasing geopolitical tension and a likely delay in US tax reform. US Treasury yields continued their drift lower to 2.22% as investors remain concerned about the French elections and the diminished prospects of US fiscal stimulus. Oil prices gave back all of last week's gains, with West Texas Intermediate dropping to nearly $50 from last week's close of $53.25. Volatility, as measured by the Chicago Board Options Exchange Volatility index, moderated to 14.7, down from 16 last week.
GLOBAL MACRO NEWS
North Korea threatens preemptive strike
In the wake of a failed missile test last weekend, North Korea this week threatened the United States, South Korea and Japan with a “super-mighty preemptive strike” after Secretary of State Rex Tillerson said the US is reviewing ways to compel the North Korean regime to re-engage diplomatically. Meanwhile, the US navy is moving an aircraft carrier battle group toward North Korea as US and South Korean forces conduct annual training exercises.
May looks to strengthen her hand
British prime minister Theresa May this week called for an early general election in the United Kingdom in an attempt to strengthen her hand in upcoming Brexit negotiations. May’s Conservative Party holds a 20% lead in most opinion polls, which suggests that the Tories will build on their slim 17-seat majority. May was elected leader of her party after former prime minister David Cameron stood down subsequent to leading the unsuccessful Remain campaign in last spring’s referendum. May has not yet faced voters as prime minister. The pound rallied to a six-month high in the wake of the 8 June election call.
US tax reform may be delayed
Treasury Secretary Steven Mnuchin downplayed the odds of Congress being able to pass tax reform ahead of the scheduled August recess. Earlier in the year, Mnuchin said he intends to overhaul the unwieldy US tax code by August, but the inability of the House Republicans to agree on a plan to repeal and replace Obamacare has delayed potential policy wins on other high priority policy issues, such as improving infrastructure.
Four candidates bunched near the top of French polls
The first round of the French presidential election takes place on Sunday, 23 April, with four candidates within striking distance of victory. The National Front’s Marine Le Pen and centrist Emmanuel Macron hold slight leads over Republican François Fillon and leftist Jean-Luc Mélenchon. The betting odds favor Le Pen and Macron advancing to the runoff on 7 May, in which Macron, the more establishment candidate, is expected to triumph. The most destabilizing outcome would be a match-up between Le Pen and Mélenchon in the runoff, as both candidates are anti-European Union.
Fed says economy expanding at a modest pace
The US Federal Reserve released its Beige Book in advance of the May Federal Open Market Committee meeting this week. The report noted continued modest economic growth and tight labor markets. Despite the Fed’s upbeat outlook for the economy, investors are dialing back expectations of multiple further rate hikes in 2017. At present, only one additional hike is fully priced in by markets.
China reports upbeat Q1 growth
China’s economic growth rate accelerated to 6.9% in the first quarter, the fastest pace in six quarters. Additionally, retail sales rose 10.9% year over year in March, handily beating estimates, as did industrial output, which rose 7.6% in March. Analysts had expected fiscal and monetary stimulus to wane in 2017, but so far it has not.
Turks vote to expand presidential powers
President Recep Tayyip Erdogan last Sunday narrowly won a referendum that expands the powers of the Turkish presidency. The margin was 51%-49%. Turkey will move from a parliamentary system to a system with an executive presidency. The new system will go into effect at the beginning of the next presidential term. Some observers fear the move is part of a continued drift toward authoritarianism in Turkey.
GLOBAL CORPORATE NEWS
Of the 82 companies in the S&P 500 Index that have reported earnings through 20 April, 74.4% have exceed analyst expectations, according to Lipper. That is above the long-term average of 64% and the four-quarter average of 71%. First-quarter earnings are expected to rise 11.1% from Q1 2016. Excluding the energy sector, the earnings growth estimate declines to 7.3%. The blended revenue growth estimate for Q1 is 6.6%. Excluding energy, it falls to 4.7%. The next-twelve-months P/E ratio for the S&P 500 is 17.3x.
THE WEEK AHEAD
- France holds the first round of its presidential election on Sunday, 23 April
- The Bank of Japan meets to set interest rates on Thursday, 27 April
- The United States releases durable goods orders on Thursday, 27 April
- The United Kingdom reports Q1 GDP on Friday, 28 April
- The US releases revised Q1 GDP figures on Friday, 28 April
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News;Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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