RECAP: For the week ending May 12th, 2017

May 13, 2017

The major benchmarks were mostly lower for the week. The Nasdaq Composite was the sole index to record a gain and touched a new high, helped by the strong performance of technology shares. Heavily weighted Apple surpassed $800 billion in market capitalization for the first time after it was revealed that Warren Buffett’s Berkshire Hathaway had taken a larger stake in the company, and semiconductor stocks were also strong late in the week. Another notable development was a decline of the “fear index”—the Chicago Board of Exchange’s Volatility Index, which typically moves inversely to stock prices—to its lowest level since 1993 on Monday. Poor performance from blue chips Disney and Boeing weighed on the narrowly focused Dow Jones Industrial Average, and the smaller-cap benchmarks also underperformed.

A generally favorable—or at least stable—economic and earnings backdrop seemed to help compensate for the week’s fresh crop of political and strategic uncertainties. Tech earnings stood out for the week, but the broader market remained on track to report its best overall quarterly profit gain since 2011, according to research firm FactSet. On the economic front, weekly jobless claims defied expectations and fell back to near four-decade lows, while continuing claims reached their lowest level since 1988. Not surprisingly, perhaps, the University of Michigan’s gauge of consumer sentiment climbed back toward the highs it established in late 2016. In a continuing pattern, however, such “soft” survey data proved stronger than “hard” data on spending and final demand. April retail sales rose less than expected, and department stores Kohl’s and Macy’s dragged consumer discretionary stocks lower after reporting disappointing first-quarter revenues.

Markets began the week on a quiet note, as investors had largely priced in Emmanuel Macron’s successful bid to become the 25th president of France. Low volumes and low volatility resulted in a largely flat Stoxx 600, the pan-European benchmark, at the end of the week. Blue chip indexes were more positive, though. German stock index DAX 30 reached a record closing high midweek, and the UK’s FTSE 100 was on track for its third consecutive weekly increase. European markets were boosted by positive economic news, including lower unemployment figures along with expectations that eurozone economic growth should be stronger this year.

Portfolio managers who cover the region expect that markets will, in the short term, continue to react positively to the election of Macron, who is a strong supporter of the European Union. Financial and telecommunication services stocks may perform well under a Macron presidency, they note, and European bond spreads are likely to tighten alongside rallies in currencies. Peripheral bonds may underperform as the markets focus on other risks, however.

Japanese stocks rocketed out of the gate on Monday (2.3%), following the five-day holiday weekend, and in part due to global markets relief following the Macron victory in France. For the week, the Nikkei 225 Stock Average gained 2.3% (438 points) and closed at 19,883.90. For the year to date, the Nikkei is up 4.0%, the broad-based TOPIX Index is ahead 4.1%, and the TOPIX Small Index has advanced 7.4%. The yen continued to steadily weaken versus the U.S. dollar and ended the week slightly below ¥114 per dollar, which is still about 2.6% stronger than ¥117 per dollar at the end of 2016.

China’s foreign exchange reserves rose more than forecast in April after the government stepped up efforts to curb capital outflows from the mainland. Foreign reserves rose by $20.45 billion from March to $3.03 trillion last month, the People’s Bank of China (PBoC) reported. April’s increase marks the third straight monthly gain for China’s cash hoard, the world’s largest. It also marks the third consecutive month that reserves have stayed above the psychologically important $3 trillion level.

Analysts pay close attention to China’s reserves because they show how much Beijing is dipping into its war chest to support the yuan, which has faced persistent depreciation pressure for more than a year. China’s reserves totaled nearly $4 trillion at their peak in June 2014. Last year, however, the government burned through roughly $320 billion to prop up the yuan, which still shed 6.6% against the dollar in its biggest annual drop since 1994. The yuan is up roughly 0.8% against the dollar so far this year.

Inflation in Brazil fell to its lowest levels in 10 years, thanks to easing food costs, the strengthening of the real against the U.S. dollar, and ample slack in the economy. The drop should enable Brazil’s policymakers to further cut interest rates this year as the country works to pull itself out of recession and fight unemployment. Oh expects the central bank will cut rates by 100 basis points in June, possibly more, since the lower house of Congress may vote to pass pension reform by then. The contentious reforms are essential if Brazil is to narrow its enormous budget deficit. 

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