Positive Q4 US earnings season and buoyant PMIs drive up equities and rates
Euro area PMIs remained high entering Q1:17 and continue to indicate upside risks to consensus estimates for real GDP growth of 0.4% qoq in both Q4:16 & Q1:17 (see graph).
US GDP growth in Q4:16 declined to 1.9% qoq saar from 3.5% qoq saar in Q3:16, below consensus expectations for 2.2% qoq saar, mainly due to negative net trade. For FY:2016, GDP increased by 1.6%, down from 2.6% in 2015. Growth expectations for 2017 will be sensitive to the evolvement of the economic policies of the new administration in the US.
The People’s Bank of China (PBoC) unexpectedly, increased its medium-term lending facility rate by 10 bps during the past week. More importantly than the minor financial tightening impact, it acts as a reminder of the authorities’ willingness to contain financial risks.
Investors will be watching for any escalation in trade tensions between the US and China, which could create volatility. In the event, China has recently communicated a conciliatory disposition, noting its willingness to enhance the protection of intellectual property rights, an area of friction with US firms, while releasing plans to ease restrictions on foreign investment in closed areas, including those of special interest for US firms (mainly financial).
Global equity markets were buoyant, with the MSCI World increasing by 1.0% wow. The S&P 500 reached an all-time high intra-week (2298), amid continuing strong Q4:2016 earnings announcements (see Table on page 3). Construction and engineering stocks led the increase (+6.2% wow), as President Trump signed an order to proceed with the construction of the Keystone and Dakota oil pipelines.
The FTSE 100 underperformed (-0.2% wow / +19.9 yoy in GBP terms), in a week underpinned by the UK Supreme Court’s ruling that the Parliament must vote before the EU Treaty “exit” clause is triggered (GBP was up 1.5% wow in NEER terms).
Government bond yields rose in the past week, as the reflation theme persists amid, inter alia, positive economic data, with 10-Year US Treasury yields up by 2 bps to 2.49% and 10-Year Bund yields up by 4 bps to 0.46% (the latter close to one-year high levels).
In Italy, the Constitutional Court ruled against ex-PM Renzi’s electoral law for the Lower House (that provisioned a 2-round system), paving the way for early elections, as soon as March, likely explaining a large part of the 12 bp rise in 10-Year BTP yields on Thursday (+21 bps wow) to 2.23%, while Italian equities declined by 0.7% (-0.8% wow).
In Turkey, currency depreciation, along with political uncertainty and terrorist attacks that damage economic confidence, led Fitch to downgrade Turkey’s Long-Term Foreign Currency (LTFC) rating to BB+ (below investment-grade) from BBB-, while not changing the respective rating in Local Currency. Subsequently, no major rating agency rates the Turkish sovereign (LTFC) investment grade.
The Turkish Lira lost 2.7% wow (-29% yoy) against the USD to TRY 3.87/$, despite the Central Bank’s tightening measures in the past week (Overnight Lending Rate: +75 bps to 9.25% and Late Overnight Lending Rate: +100 bps to 11.0%).