Major equity markets drifted last week, with smaller-cap shares trailing large-caps. The energy sector showed some strength at midweek, helped by signs of robust refinery demand and a rise in oil prices to their highest level in a month. The launch of missile attacks on Thursday evening against Syrian forces further boosted oil prices and sparked a shift into defense stocks as well as safe-haven assets, with gold prices reaching a five-month high.
The market remained in a wait-and-see posture for most of the week, as trading volumes remained subdued and investors awaited firm signals on policy changes coming from Washington. Wednesday saw the biggest market moves, with stocks initially rallying on a strong reading on March private payrolls growth from payroll processing firm ADP. Stocks suffered a sharp reversal in the afternoon, however, after Reuters reported that Speaker of the House Paul Ryan had admitted that the House, Senate, and White House “aren’t on the same page yet on tax reform.”
Enthusiasm over job growth data evaporated on Friday morning, when the Labor Department’s official payrolls report came in well below expectations. The report showed only 98,000 new jobs added in March, the worst showing since last May, while previous months’ gains were revised lower. Stock futures fell after the release but soon steadied as investors appeared to place blame on a weather-related drop in employment in the Northeast. The unemployment rate also fell unexpectedly, reaching 4.5%, its lowest level in 10 years.
The payrolls miss had a larger impact on the bond market, with the yield on the 10-year Treasury note touching its lowest level (2.27%) since last November in the wake of the report. Yields climbed sharply higher later on Friday, apparently in response to suggestions from New York Fed President William Dudley that the Fed might temporarily halt rate increases when it trims its bond portfolio—a process that might begin this year, according to minutes from the last Fed meeting released Wednesday. Yields ended the week lower despite the late rise, and Treasury prices rose as yields fell.
European benchmarks, including the pan-European benchmark Stoxx 600, were flat to lower as banking and basic materials stocks weighed on performance. One bright spot was higher oil prices, which lifted energy stocks. After a slow start, the week brought increased investor optimism following supportive manufacturing economic data and a poor showing in a French political debate by anti-euro National Front leader Marine Le Pen. European equities fell slightly toward the end of the week but stabilized after European Central Bank President Mario Draghi clarified that it was still too soon to reduce current stimulus measures despite a welcome rise in inflation.
Investors expect European corporate earnings growth to continue and for earnings to show a resilience that is in sharp contrast to the pattern in recent years. Modest upward pressure on European earnings growth estimates means that consensus expectations now stand at around 14% in 2017. If earnings growth is realized this year and beyond, this should give investors greater confidence about the valuation opportunity in European equities.
The large-cap Japanese stock market benchmarks declined for the week. The widely-watched Nikkei 225 Stock Average closed the week at 18,664.63, losing 1.29% (245 points) versus the prior week. The previous week brought news that February’s retail sales data in Japan were disappointingly soft and that spring wage increases for Japanese workers were the lowest in four years. Despite this lackluster backdrop, consumer confidence improved in March, rising to 43.9 from 43.2 in February and beating estimates of 43.5. It was the highest reading since September 2013 as perception improved for all underlying components, including overall livelihood, employment, and willingness to buy. Investors are keeping a close eye on the typically cautious Japanese consumer for signs of success or failure in the Shinzo Abe government’s years-long efforts to stimulate economic growth and inflation.
China’s foreign currency reserves rose in March for the second consecutive month, offering good news for the Chinese government, which has wrestled with persistent capital outflows over the past year. Foreign reserves rose by $3.96 billion last month to $3.009 trillion, the People’s Bank of China disclosed, following a $6.9 billion gain in February, which ended a seven-month slide.