Daily reviews

29.04.2019

China stimulus worries hurt investor sentiment, strong dollar sends the euro to nearly two-year lows

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The greenback weakened on Friday despite a strong headline GDP reading. The U.S. GDP came in stronger than expected. But growth was aided by a buildup in inventories and a surge in net exports, which are likely to be reversed in future quarters. These fears drove the USD down.

  • Asian markets were lower on concerns that the Chinese government will slow its stimulus
  • S&P 500 and the Nasdaq finished at fresh record highs, with earnings mostly topping lowered market expectations
  • Dollar rallied broadly but the details of the GDP report raised questions
  • Euro at nearly two-year lows as German economy continues to disappoint
  • Trump sent oil prices lower after a spectacular rally
  • Gold registered its first weekly gain in five

Asian equities

Asian markets finished mostly lower last week, with investor expressed concerns that the Chinese government will slow its economic stimulus efforts on the back of a better-than-expected economic growth so far this year. It is important for risky assets in general as China's stimulus has been a major source of relief for global financial markets, and now signs of shifting gears by the government and shifting away from stimulus and towards reform and restructuring make investors worry.

Against this backdrop, Chinese stocks saw the worst weekly return since last year, while an aggressive drop in oil prices on Friday depressed the markets as well. The Shanghai Composite slid 1.1%, for a 5.6% drop, its worst weekly finish since October 2018. Japan’s Nikkei fell 0.2%, while Hong Kong’s Hang Seng index edged up 0.2%. The Kospi declined 0.5%, disappointed by dismal data. First-quarter South Korea’s gross domestic product fell 0.3% against expectations for a 0.3% gain, marking the worst quarter since the global financial crisis.

US equities

US equities were mostly higher last week, with S&P 500 and the Nasdaq finished at fresh record highs. The Dow Jones Industrial Average rose 81.25 points, or 0.3%, to end at 26,543.33 on Friday, while the S&P 500 index added 13.71 points, or 0.5%, to finish at 2,939.88. The Nasdaq Composite Index advanced 27.72 points, 0.3%, to close at 8,146.40. For the week, the Dow fell 0.1%, the S&P 500 climbed 1.2% and the Nasdaq rallied 1.9%, its fifth weekly gain in a row. Corporate results continue to roll in with first-quarter earnings mostly topping lowered market expectations. Stronger-than-expected first-quarter U.S. gross domestic product growth helped to partially offset the negative impact of some disappointing earnings.

Intel Inc. shares dropped 9%, after the company’s outlook fell way below investor estimates. Exxon Mobil Corp. also disappointed market participants after the announcement that its first-quarter earnings-per-share fell well short of expectations. As a result, the company’s stock sank 2.1%.

In general, further signs of easing US-China trade tensions, a more dovish stance from major central banks and rising corporate earnings continue to support positive investor sentiment. Over 40% of the S&P 500 companies have reported their results already, and the numbers show that corporate profits are on track to register small gains in the first quarter.

Currencies

The dollar was trading higher against the majors for the most part of the week. The greenback weakened on Friday despite a strong headline GDP reading. The U.S. GDP came in stronger than expected. But growth was aided by a buildup in inventories and a surge in net exports, which are likely to be reversed in future quarters. These fears drove the USD down. The U.S. economy grew at a 3.2% pace in the first quarter, accelerating from 2.2% at the end of last year. Meanwhile, consumer spending slowed to 1.2%. The University of Michigan said the final reading of its consumer sentiment index in April was 97.2, down a touch from the 98.4 in reading in March. New orders for US-made capital goods increased by the most in eight months in March, hitting their highest level on record. In the labor market, initial claims for state unemployment benefits jumped to 230,000 for the week ended April 20. The increase was the largest since early September 2017. However, the underlying trend continued to point to labor market strength.

EURUSD dipped to mid-2017 lows marginally above the 1.11 handle amid a broadly stronger greenback and ongoing concerns over the health of the German economy. Fresh business confidence data far from helped alleviate those concerns, with all the ZEW sentiment indices deteriorating in April. IFO data from Germany also disappointed, with the headline business climate index came in at 99.2 in April, weaker than last month’s 99.6 and missed the consensus estimate of 99.9. Meanwhile, the current economic assessment also missed expectations, arriving at 103.3 points as compared to last month’s 103.8 and 103.6 anticipated. Another bearish report increased the selling pressure on the common currency.

This week, the key economic events are the US manufacturing Purchasing Managers' Index and the interest rate decision from the Federal Reserve released on Wednesday, as well as April's jobs report on Friday.

Commodities

Gold futures finished higher Friday after the U.S. GDP data came in better than expected, while other details of the report raised questions about the underlying strength of the economy. Earlier in the week, the bullion fell to their lowest level this year at $1,265.90 but then recovered and closed at $1,285. As a result, the bullion registered its first weekly gain in five, though a generally stronger dollar somehow capped gains for gold. The Goldman analysts lowered their gold forecast but said they still remain bullish. They reduced their three-month view to $1,300 from $1,350, the six-month view to $1,325 from $1,400 and 12-month view to $1,375 from $1,450.

Crude oil markets had a busy and interesting week. Brent registered fresh early-November highs around $74,70 but slipped aggressively on Friday and turned negative in the weekly charts as a result. The initial rally accelerated amid growing concerns over the potential supply shortage, after Trump decided to tighten sanctions against Iran. The positive sentiment was also fueled by signals from Saudi Arabia, where the energy minister said he saw no need to raise oil output immediately after the United States ends waivers granted to buyers of Iranian crude. However, on Friday, the prices dropped dramatically amid the reports that Trump said he "called OPEC" and asked them to lower oil prices. Later, OPEC Chief Barkindo said he hasn't spoken with Trump. Saudi officials also say they haven't discussed lowering oil prices with Trump. As a result, Brent plunged over 3% and registered three-week lows around $70,60. Baker Hughes reported that the number of active U.S. rigs drilling for oil fell by 20 to 805 this week. That followed a decline of eight the previous week. But it didn’t help the market after speculations about Trump which came as a driver for profit-taking at attractive levels.