European stocks rose to their highest in over a year on Monday just as U.S. earnings season gets into full swing this week and a raft of Chinese data is due to offer insight into how quickly the world’s second-largest 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 to buoy sentiment in markets, whipped around last month by turmoil in the banking sector.
“Kicking off on a high note, the U.S. earnings season saw leading U.S. banks disclose figures that exceeded expectations, even in light of the sector’s recent upheaval,” said Bruno Schneller, a managing director at INVICO Asset Management.
This upbeat news lessened the odds of a rate reduction later this year, said Schneller.
Markets have also seen a mood shift on the outlook for U.S. interest rates, with CME futures implying an 81% chance the Federal Reserve will increase rates by a quarter point to 5.0-5.25% in May.
Resilience in core U.S. retail sales and a jump in inflation expectations reported on Friday have led investors to trim the amount of easing expected later this year to around 55 basis points (bps) in total.
At least eight top Fed officials are speaking this week, including three governors, and could generate plenty of headlines to move the dial further.
The pan-European STOXX 600 index (.STOXX) touched a fresh 14-month high and was last up 0.14%, while the blue-chip STOXX50 index (.STOXX50) hit a new 22-year peak and U.S. stock futures pointed to a flat to slightly positive open on Wall Street.
World shares (.MIWD00000PUS) and Japan’s Nikkei (.N225) traded flat.
Chinese blue chips (.CSI300) added 1.4% ahead of data on retail sales, industrial output and gross domestic product due on Tuesday, where analysts suspect the risks are for an upside surprise given recent strength in trade.
Figures over the weekend showed China’s new home prices climbing at the fastest pace in 21 months, supporting consumer demand and confidence.
EARNINGS KEY
S&P 500 futures climbed 0.1%, with Nasdaq futures mostly flat ahead of earnings reports led by Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Bank of America (BAC.N).
In Europe, financial shares underperfomed the broader market and were last down about a third of a percent (.SX7P).
Other big U.S. names reporting earnings this week include Johnson & Johnson (JNJ.N), Netflix (NFLX.O) and Tesla (TSLA.O).
Analysts expect Q1 S&P 500 earnings to fall 5.2% from the year-earlier period, though Bank of America (BofA) analyst Savita Subramanian is more concerned about the outlook for 2023.
“Overall, we expect an in-line quarter, but big cuts for the full-year,” BofA warned. “Our 2023 EPS estimate for the S&P 500 remains $200, still 9% below consensus estimates.”
“Demand for consumer goods has already softened and now we’re watching services,” Subramanian said. “Airlines, hotels and restaurants are feeling pressure from slowing macro, tough comps (comparison periods) and no respite from wage pressure.”
In bond markets, the shift in Fed expectations pushed U.S. two-year yields up to 4.11%, having risen 11 basis points last week.
German, French and Italian two-year yields traded flat on Monday.
Markets are pricing 37 bps of tightening at the ECB’s May meeting and 82 basis points by October.
That ramp up in rate increase expectations saw the euro gain 0.8% last week, even after a dip on Friday. The single currency was holding at $1.09775 on Monday having hit a one-year high of $1.1075 last week.
The dollar has fared better on the yen as the Bank of Japan remains committed to its super-easy monetary policy, at least for now. The dollar climbed to a one-month high against Japan’s yen on Monday rising to 134.22 yen earlier in the session, the highest level since March 15. It was last up 0.16% at 133.9.
The bounce in the dollar took some of the shine off gold which was back at $2,009 an ounce , off last week’s peak above $2,048.
Oil prices have enjoyed four straight weeks of gains, helped by cuts to output and as the West’s energy watchdog said global demand will climb to a record this year on the back of a recovery in Chinese consumption.
The market was consolidating on Monday with Brent and U.S. crude down 0.7% at $85.79 and $81.99 (at 1011 GMT) a barrel, respectively.
