European markets hit fresh highs; US quits the Paris agreement

For the week ending 2nd June 2017

  • US nonfarm payrolls rose 138,000; March/April revised down
  • European markets hit fresh highs
  • Draghi suggests no immediate policy shift
  • UK polls narrow for Conservatives
  • US quits the Paris agreement

U.S. stocks rose for the second consecutive week, bringing the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite Index to new highs. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), remained historically muted, falling to 9.9 from 10.8 last week.

GLOBAL MACRO NEWS

US adds fewer jobs than forecast

The May employment report was a disappointment save for a continued drop in the unemployment rate. 138,000 new jobs were added last month, while revisions to March and April data trimmed 66,000 from pervious totals. Economists had expected a rise of 184,000 nonfarm payrolls. Wage gains were steady at 2.5% versus a year ago. The bright spot in the report was the continued fall in the unemployment rate, which edged down to a 16 year low of 4.3%. While weaker than expected, the data likely won’t dissuade the US Federal Reserve from hiking rates later this month.

The EU in Review

Eurozone stocks posted gains for the week. Britain’s FTSE 100 and Germany’s DAX reached fresh highs as investors turn toward Europe and other developed markets. European equities saw a 10th consecutive week of inflows according to data from Bank of America Merrill Lynch. Cyclical stocks led gains, while energy stocks, which include oil and gas and renewables, were laggards, weighed down in part by news of the U.S. announcement to withdraw from the Paris agreement on climate change. European political concerns resurfaced amid the growing possibility of early parliamentary elections in Italy, but news that Italy logged better-than-expected economic growth lifted Italian stocks late in the week.

Draghi: Not ready to unwind stimulus

Appearing before the European Parliament’s committee on economic affairs this week, European Central Bank President Mario Draghi played down the odds of any shift in policy at next week’s rate-setting meeting. Economic growth is improving but inflation remains subdued, the central banker said, adding that the economy still requires substantial stimulus. Some analysts had expected the ECB to signal that it will begin tapering bond purchases later this year. Very subdued Eurozone inflation data (+1.4% year over year) released later in the week further tamped down expectations of a policy shift.

UK polls tighten

Opinion polls ahead of next week’s UK general election have been wide and varied with some showing the Conservatives with a lead as small as 3% and others indicating a lead as wide as 15%. What is not in doubt is that the race has tightened; the Conservatives held a 22% advantage on the day the election was called back in April. Not helping the Conservatives, Prime Minister Theresa May was criticized for skipping a BBC-sponsored debate, choosing instead to send a surrogate. Labour Party leader Jeremy Corbyn pounced on the decision. May tried to keep the focus on Brexit, saying Corbyn is not suited to lead those negotiations with the European Union.

US pulls out of Paris Agreement

Saying he was elected to represent the voters of Pittsburgh, not Paris, US president Donald Trump this week announced that the United States would pull out of the Paris climate deal. The agreement put the US at a disadvantage, Trump said, highlighting its lack of enforcement mechanisms. Trump offered to renegotiate the deal, though Germany, France and Italy have been dismissive of the notion.

Italy moving closer to early elections

Elections could come as early as this autumn if the Italian parliament adopts a new election law resembling German’s proportional system, with a 5% cutoff for smaller parties. If the law is approved in the coming weeks, as expected, Italians could go back to the polls around the same time as Germany votes on 24 September. The ruling Democratic Party and the Eurosceptic Five Star Movement are nearly tied atop the polls.

Europe continues to hog the growth spotlight

While manufacturing in the US and China moderated slightly in May, Europe continues to show strength. The Eurozone manufacturing purchasing managers’ index firmed to 57.0 from 56.7 in April, the highest in six years. UK PMI stayed robust at 56.7, down from April’s 57.3, while the US ISM Manufacturing Index saw slight improvement to 54.9 In May from 54.8 in saw slight improvement to 54.9 In May from 54.8 in April. China’s official PMI stood unchanged at 51.2, though the Caixin PMI dipped to 49.6 from 50.3.

EARNINGS NEWS

With 492 of the members of the S&P 500 Index reporting, earnings are expected to have increased 15.4% in the first quarter versus the same quarter a year ago. Excluding the energy sector, earnings rose 11.1%. Revenues are seen up 7.3%, and up 5.4% excluding energy.

THE WEEK AHEAD
Date Country/Area Release/Event
Mon, 5 June Global Service sector purchasing managers indices
Tues, 6 June Australia

Reserve Bank of Australia interest rate decision

Tues, 6 June Eurozone

Retail sales

Wed, 7 June China Foreign exchange reserves
Wed, 7 June Eurozone

Gross domestic product

Thurs, 8 June Japan

Gross domestic product

Thurs, 8 June United Kingdom General election
Thurs, 8 June       China Trade balance
Thurs, 8 June Eurozone European Central Bank rate decision
Fri, 9 June Canada

Unemployment rate