Market Glance (April Edition)

by James Austin

After a reluctant start to the month, global equities bounced back in a big way in April as geopolitical storm clouds cleared following the first round of the French presidential election.

Money also poured into European stocks like it was 2015 as investors sought refuge from the increasingly volatile Trump reflation trade.

Volatility Hits Five-Month High

Wall Street and European stocks declined sharply in the first half of April, as investors continued to doubt U.S. President Donald Trump’s pro-growth agenda. Despite signing more executive orders than any president since Harry Truman, Trump was unable to score any major legislative victories through his first 100 days in office.[1]

Confidence in the administration waned after the president launched 59 Tomahawk missiles at a Syrian government airbase in response to an alleged chemical weapons attack. The strike was considered highly uncharacteristic of a leader who strongly condemned any intervention in Syria while campaigning to become president.

At its weakest, the U.S. S&P 500 Index sunk to two-month lows as implied volatility spiked to its highest level since the U.S. presidential election. Across the Atlantic, European stocks fell to six-week lows.

The exodus from stocks lifted precious metals to yearly highs as investors piled into traditional haven investments to hedge against risk.[2]

Equities Rebound on French Election Optimism

Investor sentiment went from negative to positive after Emmanuel Macron secured first place in the initial round of France’s presidential election, alleviating worries of a Eurosceptic-only runoff. Macron, a pro-European Union centrist, beat far-right Marine Le Pen in the second round of voting on May 7.

The election results that triggered a massive two-day rally in global equities, with France’s CAC 40 Index hitting 14-year highs, have now subsided as investors sell their positions and take profits. The pan-European Stoxx 600 has also closed at its highest level in 20 months.

U.S. equities also soared, with the S&P 500 and Dow Jones Industrial Average nearing all-time records. Post-election euphoria helped the technology-heavy Nasdaq Composite Index set multiple record highs in the final week of April.

Fund Managers See Upside in Europe amid Rumblings on Wall Street

Capita has been pouring into European equities at a much faster pace recently, a sign investors are growing more confident in the region’s economic outlook. That was the major takeaway of the latest Bank of America Merrill Lynch (BAML) survey of portfolio managers, which was conducted before the April 23 French election.

BAML said allocation to U.S. equities dropped to its lowest level since before the financial crisis, with fund managers opting for European equities instead. Strong corporate earnings, a recovering banking sector and a generally improving Eurozone economy have bolstered demand for regional assets.[3]

The buying frenzy continued after the French election, with investors pouring $2.4 billion into European equity funds in the week ended April 26. That’s the highest since December 2015, according to BAML, which cited EPFR Global data.[4]

Brighter Outlook for Europe?

Recent economic indicators suggest the Eurozone economy is gaining traction, with measures of inflation, industrial production and employment all pointing higher.

Annual inflation accelerated 2% in February, matching the European Central Bank’s target for the first time in four years. Although consumer price growth cooled in March, the general trend appears to be trekking higher.

The International Monetary Fund (IMF) raised its estimate of Eurozone growth slightly last month, but warned of potential geopolitical risks in the form of Brexit and upcoming elections.

The D.C.-based lending institution expects the single currency market to expand 1.7% this year, up from its January estimate of 1.6%.[5]

The ECB maintained its ultra-loose monetary policy stance last week though Governor Mario Draghi surprised the market by explicitly commenting on the region’s stronger recovery. Markets have been closely monitoring the ECB to determine whether officials are eyeing policy normalization in the wake of the recent pickup in economic data.

Economists recently surveyed by Bloomberg said the central bank will start rolling back its quantitative easing program more quickly than previously assumed. The poll suggests policymakers will revise their forward guidance on monetary policy as early as June, which is six months earlier than the previous survey.[6]

[1] Marshall Cohen and Wade Payson-Denney (April 29, 2017). “By the numbers: How Trump stacks up after 100 days.” CNN Politics.

[2] Sam Bourgi (April 11, 2017). “S&P 500 Futures Tumble, Pushing Volatility to Five-Month Highs.” Economic Calendar.

[3] Reuters (April 18, 2017). “European stocks in, U.S. equities out – BAML survey.”

[4] Aleksandra Gjorgievska (April 28, 2017). “Investors Are Pouring Money Into European Stocks Like It’s 2015.” Bloomberg.

[5] AFP (April 18, 2017). “IMF slightly ups eurozone growth forecast.” Luxemburger Wort.

[6] Alessandro Speciale and Andre Tatar (April 23, 2017). “Draghi Seen Choosing Faster Exit Once French Hurdle Cleared.” Bloomberg Markets.