RECAP: For the week ending April 28th, 2017

May 1, 2017

A sharp rally early in the week brought both the Nasdaq Composite and small-cap Russell 2000 Indexes to record highs, although the other major benchmarks remained slightly below the peaks they established on March 1. The technology-heavy Nasdaq also broke through the 6,000 threshold for the first time, over 17 years since it first crossed 5,000—a sharp contrast to the 10 weeks it took for the index to leap from 4,000 to 5,000 at the height of the tech bubble.

On Thursday, Donald Trump announced that the U.S. would proceed with negotiations to update NAFTA. The news came after speculation that the U.S. was readying to quit the trade agreement. The U.S. has imposed a preliminary 20% tariff on softwood lumber imports from Canada and threatened to broaden the action to include the country’s dairy trade. The Canadian dollar slumped this week as concern mounted that the trade dispute would muddle NAFTA negotiations. The tariff might have a slight impact on Canadian growth. The greater concern, he said, is that it may be a signal that the U.S. administration will pursue a more aggressive stance in trade renegotiations. It could, he added, introduce a period of uncertainty and affect business or consumer confidence. In addition, said Tan, the Canadian dollar remains vulnerable to such bursts of anti-trade rhetoric.

Overseas developments provided a solid boost to sentiment on Wall Street as the week began, with U.S. stocks following most global markets sharply higher in response to the French election results on the previous Sunday. Traders noted that mergers and acquisitions (M&A) activity, both rumoured and announced, also drove the markets.  Some good first-quarter earnings results also boosted the indexes and helped the market carry momentum into Tuesday. In particular, aluminium giant Alcoa, whose extensive operations often make its earnings a proxy for the health of the global economy, rose after beating earnings estimates and predicting solid growth in demand for the metal in the coming year. The busiest day of the earnings season came Thursday, with nearly 300 companies reporting profits. To a broader theme the major indexes barely budged.

European markets began the week on a high note, following correct predictions about the outcome of the first round of French elections: a comfortable first-place finish for pro-EU globalist Emmanuel Macron over anti-EU nationalist Marine Le Pen. Bank stocks surged and the euro rose to five-month highs early in the week. Bullish sentiment continued through midweek as multiple geopolitical events faded. Gains faded on Thursday and Friday, but most major indexes, including the pan-European Stoxx 600, ended the week higher.

In France, government bonds rallied strongly as concerns around political risk receded. French 10-year government bond yields fell to around 0.83% as of Thursday, and the spread versus German bunds narrowed. French presidential candidates Macron and Le Pen will contest the final round on May 7

Japanese stocks rallied sharply, with the large portion of the gains accruing early in the week. The Nikkei 225 Stock Average climbed 3.1% (576 points) and closed at 19,196.74. Thanks to this week’s rally, for the year to date, the Nikkei is up 0.4%, the broad-based TOPIX Index is ahead 0.9%, and the TOPIX Small Index has advanced 3.4%. The yen weakened this week, closing above ¥111 per U.S. dollar, about 4.7% stronger than ¥117 per U.S. dollar at the end of 2016.

Industrial profits in China surged in March from a year ago amid a sustained real estate boom, though the pace of growth eased from the breakneck speed of previous months. Profits at Chinese steel mills, smelters, and other industrial firms climbed nearly 24% in March from the prior-year period, reported the country’s statistics bureau. In the first quarter of 2017, industrial profits jumped about 28% from a year earlier, compared with roughly 32% year-over-year growth in the first two months of 2017, the statistics bureau said. The strong profit growth in China’s industrial sector suggests that fixed-asset investment—a key economic driver that encompasses investment in factories and buildings—will continue to recover in the coming months.


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