A Fade of the Risk Trade Europe delivered three body blows to equity markets this week, dampening increasingly bullish spirits following U.S. stocks’ best quarterly start since 1998. Eurozone unemployment was reported to have risen again, to a rate of 10.8 percent that now stands at a 14-year high. As well, risk appetites waned after a lack of new monetary stimulus from the European Central Bank (ECB) and a surprisingly poor Spanish bond auction that pushed interest rates on 10-year debt to a multi-week high of 5.74 percent. While Italy’s new technocratic government has made what appears to be an earnest attempt at labor market reform amid implementation of austerity measures, Spain’s rising risk premium reflects its relative intransigence regarding austerity measures dictated by European leadership. Spain is attempting to meet Brussels part way with a plan to reduce its budget deficit to 5.4 percent of GDP; however, with unemployment above 20 percent and fiscal austerity being implemented as part of the new budget, this cat will struggle to catch its tail. The U.S. Federal Reserve’s revealed lack of appetite for QE3 also dissuaded investors, resulting in equity markets retreating by about 1 percent. Will tomorrow’s monthly payroll report make for a Good Friday? U.S. stock investors will have to wait until Monday to weigh in because markets here are closed tomorrow. Amidst choppier seas, Treasuries rallied.
A Tradition Unlike Any Other Golf fans will enjoy what promises to be great theatre at the Masters this weekend as Wall Street gears up for its own tradition that begins anew next week. Analysts project first quarter earnings to grow at a low single-digit rate that would be the slowest rate in several years. Will companies once again under-promise and over-deliver? While investors might think that a steady stream of better-than-expected economic data in recent months would be factored into estimates, consensus estimates have moved very little so far this year. The trade-weighted dollar actually fell 2 percent in the first quarter versus widely held expectations for continued strength amid the stress and turmoil that characterized Europe at year-end. What’s germane to the earnings of multi-national companies is the average exchange rate for the period, and with the dollar trending lower throughout the quarter, investors could be surprised by not only the translated value of foreign earnings, but more importantly any forecast updates that companies factor into their 2012 outlooks. Alcoa, JP Morgan, and Wells Fargo will kick things off next week with their first quarter numbers.
Our Takeaways from the Week
- Europe threatens to become a problem again for equity investors
- First quarter earnings reports on tap