Market Pause

April 26, 2017

After sharp advances on the first two days of the week, equities flattened as investors assessed whether so much optimism is really justified.

  • Opinion polls, which point to a comfortable win for Macron over Le Pen in the early May presidential run-off election, have been wrong before as we saw in Britain and the United States. Le Pen still took over a fifth of the vote, more than the far right had done previously. It takes a leap of faith to think that the nationalistic backlash against globalization has peaked.
  • The Trump rally has been powered by his business-friendly proposals. But congressional gridlock hasn’t ended. The plan to slash U.S. corporate taxes to 15% is an opening bid, not the final result, and would be associated with future deficits that have worried markets in the past. A partial government shutdown is possible.
  • Protectionism, currency wars, and the specter of economic and geopolitical damage such inclinations caused in the Great Depression remain continuing possibilities. Russian President Putin successfully jawboned the ruble lower today. Today also is Chernobyl Day, the 31st anniversary of the worst nuclear energy industrial accident, which occurred in the former Soviet Union. Nuclear weapons had been used 41 years earlier in wartime for the first and thus far only time, but the unstable situation between North Korea and other countries may yet break that streak.
  • There have been some good corporate earnings reports this week, but one has to wonder if a disconnection between the growth of profits and real GDP remains infinitely sustainable, since such implies increasing income and wealth dispersion. This is the core stress behind the resurgence of populism.

While Japan’s Nikkei rose 1.1% for a second straight day on Wednesday, equities fell 0.1% in Hong Kong and both the U.K. and Germany so far. Italian and Spanish share prices are likewise down 0.5%.

The 10-year German bund and U.S. Treasury yields have dipped two and one basis points, respectively.

West Texas Intermediate crude oil dropped 0.7% and further below the $50 level. Low commodity prices have been associated with sluggish global demand in recent years. Comex gold edged 0.1% lower.

The dollar has risen 0.9% against the kiwi, 0.7% relative to the Australian dollar, 0.4% versus the peso and euro, 0.3% vis-a-vis the yen, 0.2% against the Swiss franc and 0.1% versus the loonie, yuan and sterling.

Turkey’s central bank monetary council left its key interest rates unchanged after its latest policy review.

Japan’s all industry index was unchanged in February from a year ago. That puts this monthly proxy for GDP up just 0.6% on year in the first two months of 2017, less than the 1.1% of on-year growth in the fourth quarter and similar to back-to-back gains of 0.5% in 2015 and 2016. While industrial production has brightened, service sector activity has floundered, rising just 0.2% on month while falling 1.3% on year in February. Separately, small business sentiment in Japan slid back under the 50 level to 48.6 in April, a 2-month low. The Bank of Japan is not expected to announce a policy change when  it releases a new Outlook tomorrow with updated growth and inflation forecasts.

Australian headline CPI inflation accelerated from 1.5% in 4Q16 to 2.1% last quarter. That figure was a tad less than expected. In previous first quarter-over-first quarter comparisons, consumer prices had risen by 1.3% in 1Q16 and 1Q15 but 2.9% in 1Q14 and 2.5% in 1Q13. Core inflation also accelerated but remained below target and even somewhat below 2.0%.

Two Swiss data series were released. The ZEW expectations index, a gauge of investor sentiment, dropped back to a still historically elevated 22.2 reading in April from a 38-month high of 29.6. And the UBS consumption indicator improved 0.05 points to a 7-month high of 1.50%.

Sweden’s economic tendency index advanced to a 4-month high of 112.8 in April, led by the best score in manufacturing since 1998. Consumer confidence also rose.

French consumer sentiment, in contrast, printed in April at 100, the identical reading as seen in each month of the first quarter.

Dutch business confidence rose 0.5 points to 8.3 in April after climbing 0.8 points in March. Belgium’s business climate index rose to a 3-month high but still negative reading in April of -0.8. In the former Belgian colony of Brazil, consumer sentiment unexpectedly deteriorated in April.

In the year to February, retail sales rose 3.6% in Mexico and 2.7% in Canada. The volume of Canadian sales dipped 0.1% on month and rose only 2.1% on year.

South African producer price inflation fell to a 15-month low of 5.2% in March.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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