Global equities pause before earnings results reveal whether rates have been affected

  • Market prices are at greater risk from the Fed’s rate hike in May
  • EU yields are rising as the odds of an ECB rate hike diminish
  • Stocks rise in hopes of US profits

SYDNEY (Reuters) – Global stock markets settled near recent highs on Monday ahead of a slew of corporate earnings results this week due to revelations that economic sectors that helped fuel high interest rates have been hit.

US banks including JP Morgan (JPM.N), Citigroup [RIC:RIC:C.UL] and Wells Fargo (WFC.N) reaped a windfall from the higher interest payments that first-quarter earnings reported on Friday. This helped lift European stocks to a 14-month high in early trade Monday, but as of 1225 GMT, the pan-European STOXX 600 index (.STOXX) was up 0.1%.

Dan Izzo, founder of investment management firm Blackbird Capital, said that while banks are seen as leading earners in the US, today’s markets are different.

“The banking sector stocks completely ripped apart on Friday, but it is important to note that besides that, every major US index closed lower that day including the Dow, S&P, Nasdaq, and Russell,” Izzo said.

Stock futures based on the S&P, Nasdaq and Dow Jones Industrial Average rose slightly, about 0.1%.

What needs to be watched, Ezzo said, is how certain companies in different economic sectors can get through the price increases from a high price environment that has been struggling.

“For the second month in a row, US retail sales in March fell, indicating a slowdown in the pace of household spending,” said Bruno Schneller, managing director at INVICO Asset Management.

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But he said consumer confidence appeared to be firm despite inflation expectations for the next 12 months rising to 4.6% in April from 3.7% in March. He added that upbeat earnings news from major banks and companies may reduce the odds of interest rate cuts later this year.

Markets also saw a mood shift in the outlook for US interest rates, with stock futures citing an 81% chance that the Federal Reserve will raise rates by a quarter point to 5.0-5.25% in May.

No fewer than eight senior Fed officials are speaking this week, including three governors, and could generate plenty of headlines to move the call further.

Global stocks (.MIWD00000PUS) and Japan’s Nikkei Index (.N225) traded flat.

Chinese blue chips (.CSI300) rose 1.4% ahead of data on retail sales, industrial production and gross domestic product due on Tuesday, as analysts believe the risks present a bullish surprise given the recent strength in trade.

Figures released over the weekend showed new home prices in China rose at the fastest pace in 21 months, boosting consumer demand and confidence.

The key to earnings

Other big US names reporting earnings this week include Johnson & Johnson (JNJ.N), Netflix (NFLX.O), and Tesla (TSLA.O).

Analysts expect the S&P 500’s first-quarter earnings to fall 5.2% from the year-ago period, though Bank of America (BofA) analysts expected earnings per share for the S&P to remain at $200, 9% below consensus estimates.

“We’re cautious about equities, because of the lagging effect on monetary policies. For example, you have tightening in lending standards, and lending to households is really declining,” said Michele Morgante, senior equity analyst at General Investments.

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In bond markets, a shift in the Fed’s outlook pushed the two-year US yield to 4.14%, after rising 38 basis points last week.

The two-year bond yields of Germany, France and Italy were little changed on Monday.

Markets are pricing in 37 basis points of tightening at the European Central Bank meeting in May and 82 basis points by October.

This rise in expectations of an interest rate hike sent the euro up 0.8% last week. The single currency settled at $1.09775 on Monday, after hitting a one-year high of $1.1075 last week.

The dollar fared better against the yen as the BoJ remains committed to its ultra-easy monetary policy, at least for the time being. The dollar rose to a one-month high against the yen on Monday, rising to 134.22 yen earlier in the session, the highest level since March 15. It was last up 0.22%, at 134 yen.

The rebound in the dollar removed some of the luster of gold, which returned to $2,008 an ounce, surpassing last week’s peak above $2,048.

Meanwhile, oil prices were steady as investors await Chinese economic data for signs of recovery in demand in the world’s second largest oil consumer.

Brent crude futures fell 0.38% to $85.97 a barrel, while US West Texas Intermediate crude CLc1 recorded $82.18 a barrel, down 0.4%.

Reporting from Wayne Cole. Editing by Kenneth Maxwell

Our standards: Thomson Reuters Trust Principles.

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