The first full week of the second quarter saw a continuation of soft global equity markets and stronger bids for safe haven assets such as U.S. Treasury bonds, gold, and the Japanese Yen. U.S. equity markets turned in their second negative week of the prior three while European markets fell for a fourth consecutive week leaving them down -9.3% on the year. U.S. Treasury yields fell 0.07% in a nearly parallel fashion, driving the 10yr yield down to 1.71%, well below the most recent core CPI level of 2.3%. The Japanese yen strengthened to a 17 month high (+11% year to date) versus the dollar despite the move in January to negative interest rates. Demand for the safe haven nature of the Yen combined with a dovish Fed has negated BoJ efforts to stimulate the Japanese economy through extraordinary monetary stimulus policies.
Fundamental indicators of the state of corporate profitability should begin to emerge with the upcoming first quarter earnings season. The S&P 500 is expected to deliver its fourth consecutive quarter of negative earnings, with Q1 forecasted to fall between -8.5% and -9.5%. In other news last week, oil rallied 7.7% on an unexpected decline in inventories and continued discussions of a freeze in non-U.S. oil production. March Fed meeting minutes were released and reaffirmed the market view that the Fed will proceed cautiously with raising rates, citing concerns surrounding global economic weakness. Probabilities of June, September, and December rate hikes are currently 18%, 38%, and 51% respectively – based on Bloomberg WIRP methodology. Lastly, the U.S. Treasury adopted an accounting rule change last week that will have an immediate impact on tax inversion M&A deals, instantly changing the prospects of corporate restructurings designed to mitigate tax drag on corporate profitability.
