U.S. equity markets posted a third consecutive weekly decline, with the S&P 500 closing back below its 50 day moving average. Corporate earnings, some notable events overseas, and a handful of U.S. economic reports garnered most of the attention. First quarter earnings season finishes this week with Wal-Mart’s report – overall numbers look set to decline for a fourth consecutive quarter. However, most estimates call for improved year over year results in the back half of 2016, with potential for fourth quarter double digit increases over the dismal 4Q 2015 results.
Brazil captured headlines this week with an impeachment vote of embattled President Dilma Rousseff. After losing over 40% in 2015, Brazil’s equity market rallied 40% off the late January market low on hopes that new leadership can right the ship and end the deep recession which knocked 5% off the country’s GDP. The Brazilian stock market is priced optimistically at 94x P/E multiple. China’s equity markets fell 2%-5% last week on news that credit growth is slowing. Credit growth of nearly 11% per annum has been an important underpinning to Chinese growth and any contraction on this metric would represent a challenge to one of the world’s most important growth engines. Despite the lack of headlines pertaining to central bank policy, equity markets in both Japan (+1.9%) and Europe (+0.9%) rallied during the week. A decline in their currencies (vs USD) provided relief to their export sectors.
U.S. economic highlights last week included a strong April retail sales report which exceeded expectations by a larger margin than any report in more than three years and also included a positive revision to the March results. The recent uptick in wage data combined with encouraging retail sales and labor markets offer an encouraging consumer backdrop to an otherwise moribund growth environment. Interest rates fell across the curve in response to a rise in volatility in the latter half of the week. The 10yr U.S. Treasury fell back to 1.70%, nearing the February 11th low of 1.64% for the year.
