RECAP: For the week ending April 21st, 2017

April 21, 2017

Stocks closed higher following a week of seesaw trading. The Nasdaq Composite Index outperformed, while disappointing results from Goldman Sachs, IBM, and Johnson & Johnson weighed on the narrowly focused Dow Jones Industrial Average. The smaller-cap indexes, which typically see larger swings, outperformed for the week but continued to lag for the year to date.

The week brought the first significant round of first-quarter earnings reports, which are generally expected to show the best rise in overall corporate profits in several years. Anticipation of Netflix’s earnings seemed to boost broader sentiment on Monday, although the stock dipped a bit and then recovered after the media giant reported after the close of trading that it had missed revenue expectations while surpassing earnings estimates. Goldman Sachs’ miss on Tuesday, along with lighter-than-expected revenues from Johnson & Johnson and negative guidance from health care services firm Cardinal Health, combined to push the indexes back lower.

Even as earnings reports flowed in, uncertainty about tax reform and other economic and political issues managed to steal the spotlight on occasion. The firm’s traders noted that the release of the Federal Reserve’s Beige Book—an anecdotal summary of economic conditions—seemed to push stocks into negative territory on Wednesday afternoon. The report indicated some concerns that economic activity was being restrained by uncertainty about fiscal policy, as well as only minimal inflation pressures.

The major European indexes were mixed for the week. Earnings season in Europe has provided a lift in the markets. Crude oil prices slipped about $2 per barrel at midweek, however, leading to softness in energy stocks.

All eyes were on France during the week as the first round of the French presidential elections on April 23 appeared poised to provide early indications about the future shape of the European Union. Market consensus suggested that presidential candidates Emmanuel Macron and Marine LePen were likely to poll the highest but with neither winning more than 50% of the vote. As a consequence, the markets were expecting that the two will vie for the presidency in a second-round election on May 7.

Japanese blue chip stocks posted steady gains throughout the week, after dipping to a multi-month low the previous Friday. The Nikkei 225 Stock Average climbed 1.6% (285 points) and closed at 18,620.75. For the year to date, the Nikkei has declined 2.6%, the broad-based TOPIX Index is off 2.0%, and the TOPIX Small Index is 0.1% lower. The yen was relatively unchanged for the week, closing slightly above ¥109 per U.S. dollar, about 6.8% stronger than ¥117 per U.S. dollar at the end of 2016.

China’s economy grew strongly in the first quarter of 2017, but the growth spurt came as the government stepped up stimulus spending, a tactic that will likely worsen China’s long-term growth risks.

Gross domestic product rose a better-than-expected 6.9% from January to March, China’s statistics bureau reported last week, lifted by credit and infrastructure spending and a booming housing market. The first quarter’s advance follows the previous quarter’s 6.8% pace, marking China’s first quarter-on-quarter acceleration in seven years. Other economic data showed surprising strength: Gauges of retail sales and industrial output surged more than expected in March, while fixed-asset investment in items such as buildings and factories picked up more than forecast in the first quarter.

The latest data offer a positive backdrop for China’s leadership, which is gearing up for an important leadership transition at a twice-a-decade Communist Party Congress meeting in November. But they also reinforce China’s continued reliance on credit-fueled investment in property and infrastructure, measures that will likely increase debt and bad loans at a time when the government is increasingly alarmed about financial risks.

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