TIAA Global Asset Management

Markets welcome positive news on corporate earnings and China

William Riegel, Chief Investment Officer TIAA Investments

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October 21, 2016

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Equities

Global equities ended the week broadly higher, as markets digested some positive U.S. economic releases, encouraging data out of China, and mostly upbeat corporate earnings results. An uneventful policy decision by the European Central Bank (ECB) added to the generally benign market backdrop.


The U.S. earnings season has gotten off to a good start. Of the 80 companies in the S&P 500 Index reporting, 63 beat expectations by more than 7%. Importantly, some 50 firms topped sales forecasts. Backed by higher interest rates and stronger trading revenue, U.S. financials have done especially well. For the month-to-date though October 20, they are the top-performing S&P 500 sector by far (+1.78%), outpacing the overall index by nearly three percentage points. For the week, the S&P 500 gained about 0.4%, partially offsetting its decline in the prior week.


Article Highlights

In Europe, the ECB, as expected, left its benchmark refinancing rate at 0% and its deposit rate at -0.4%, meaning that banks still must pay to leave excess cash at the central bank overnight. Markets received few specifics about the future of the ECB’s current quantitative easing (QE) program, aside from confirmation that its asset purchases will remain at €80 billion per month until March 2017, the scheduled end-date. 

ECB President Mario Draghi suggested he will provide broader details at the ECB’s next meeting on December 8, when updated macroeconomic projections will be available. Nonetheless, market expectations for stimulus to extend past March sent the euro to a seven-month low versus the U.S. dollar, helping Europe’s broad STOXX 600 Index return 1.3%.

In Asia, China’s economy grew at an annual rate of 6.7% in the third quarter—the third consecutive quarter in which the Chinese government reported that GDP expanded at precisely that pace. Easy credit, a surging property market, and government stimulus contributed to the growth. Chinese equities rallied during the week, as did Japan’s Nikkei 225 Index, which notched a six-month high on the back of a steady yen and upbeat earnings.

Current updates to the week’s market results are available here.

Fixed income

Fixed-income markets focused on the developing world, as Saudi Arabia issued its first-ever dollar- denominated debt. At $17.5 billion, it is the largest issue ever by an emerging economy, topping Argentina’s $16.5 billion offering in April. Investor orders topped $67 billion, reflecting robust demand. 


In the U.S., returns for non-Treasury “spread sectors” ranged from slightly to solidly positive for the week through October 20. A drop in inventories helped send oil prices to a 15-month high, supporting high-yield bonds. Their investment-grade counterparts also performed well, bolstered by positive fund flows. Year to date through October 20, these asset classes have returned 16.4% and 9.1%, respectively.

U.S. Treasuries joined in the rally, as the yield on the bellwether 10-year note dipped from 1.79% at the beginning of the week to 1.74% on October 21. (Yield and price move in opposite directions.)


U.S. data releases are mixed to positive

Some bright spots for the U.S. economy were evident in data released during the past week, including signs of slowly building inflation and sustained housing market strength. Among the reports:

Outlook

In U.S. equity markets, we still believe the S&P 500 index may reach 2,250 by year-end and perhaps 2,400 over the next 12 months. Supporting this view is a report that portfolio managers are hoarding cash at levels not seen since 2001. This is a contrarian indicator that in the past has often served as a springboard for a market advance.


A sharp spike in longer-dated Treasuries—for example, a rise in the 10-year yield to around 3%—could halt the S&P 500’s advance, though we don’t anticipate rates reaching that level for some time. Disappointing earnings growth, possibly resulting from a strengthening dollar or higher labor costs, among other potential causes, could also hamper future gains. 

Volatility remains low in fixed-income markets. It may increase before year-end—particularly as we approach the Fed’s December meeting—if investor sentiment shifts strongly or equity market turbulence accelerates. While today’s relatively sedate environment provides a better backdrop for locking in profits on select higher-risk credits, periods of wide price swings offer superior opportunities for active managers to buy bonds at attractive prices.

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