- 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) – European stocks rose on Monday to their highest in more than a year, as earnings season in the United States kicked off its peak this week, and a batch of Chinese data was set to provide insight into the pace of the world’s second-biggest company. The economy is recovering.
Better-than-expected first-quarter earnings reports on Friday from JP Morgan (JPM.N), Citigroup (C.UL) and Wells Fargo (WFC.N) helped boost sentiment in markets, which were hurt last month by turmoil in the banking sector. .
“Earnings season in the US has started on a high note, with leading US banks reporting numbers that beat expectations, even in light of the recent turmoil in the sector,” said Bruno Schneller, Managing Director at INVICO Asset Management.
Schneller said this optimistic news made the odds of a rate cut later this year diminished.
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.
Resilience in US core retail sales and a jump in inflation expectations reported on Friday caused investors to trim the amount of easing expected later this year to about 55 basis points in total.
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.
The pan-European STOXX 600 (.STOXX) touched a 14-month high and was last up 0.14%, while the STOXX50 (.STOXX50) hit a 22-year high. US stock futures pointed flat to slightly positive at Conquest on Wall Street.
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
S&P 500 futures rose 0.1%, and most Nasdaq futures were flat ahead of earnings reports led by Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Bank of America (BAC.N).
In Europe, financial stocks underperformed the broader market and last fell about a third of a percent (.SX7P).
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 same period a year earlier, though Bank of America (BofA) analyst Savita Subramanian is more concerned about the outlook for 2023.
“In general, we expect quarterly, but significant discounts for the full year,” Bank of America warned. “Our estimate for 2023 EPS for the S&P 500 remains $200, still 9% below the consensus estimate.”
“Consumer demand has already fallen and we are now watching services,” Subramanian said. “Airlines, hotels and restaurants are feeling pressure from the big business slowdown (comparison periods) and discomfort from wage pressures.”
In bond markets, a shift in the Fed’s outlook pushed the two-year US yield to 4.11%, after rising 11 basis points last week.
German, French and Italian two-year bond yields traded flat 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 increase sent the euro up 0.8% last week, even after it fell on Friday. 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 Japanese yen on Monday, rising to 134.22 yen earlier in the session, the highest since March 15. It was last up 0.16% at 133.9.
The rebound in the dollar removed some of the luster of gold, which returned to $2,009 an ounce, far from last week’s peak above $2,048.
Oil prices enjoyed four consecutive weeks of gains, helped by production cuts, and the West’s energy watchdog said global demand would rise to a record high this year on the back of a rebound in Chinese consumption.
The market was consolidating on Monday with Brent and US crude falling 0.7% to $85.79 and $81.99 (1011 GMT) per barrel, respectively.
Reporting from Wayne Cole. Editing by Kenneth Maxwell
Our standards: Thomson Reuters Trust Principles.