Limited room for further euro gains as France votes
ECB meeting and US tech earnings loom large for investors this week
Here’s what we are watching at FT markets as a new week begins.
How far can the euro go?
After the relief rally comes...more euro strength? The single currency was gaining even ahead of Sunday’s first-round presidential election that produced the result investors had hoped for: a second-round showdown between centrist Emmanuel Macron and far-right leader Marine Le Pen. Polls give Mr Macron a clear lead.
The euro touched a three-week high against the dollar last week and jumped 2 per cent on opening in Asia on Monday to reach a five-month high of $1.0937. The more pressing question may be less about the euro and more about whether European bond yields will also rise, narrowing the gap further with their US counterparts.
Analysts at Société Générale note that the euro’s low came when the gap between real two-year German and US spreads reached a peak at 170 basis points. That has narrowed to 105bp as of Friday and could shrink further on Monday if yields pop higher on Sunday’s French result.
Arguing against significant further near-term gains are several as-yet unanswered questions, namely whether Mr Macron will win the second-round vote; whether French legislative elections in June could yet pit the new president against a hostile parliament; and whether the European Central Bank will further reduce its quantitative easing programme.
Has pressure on the ECB to upgrade its economic outlook eased?
Attention will turn by the middle of the week to the ECB, which meets on Thursday. It will be the first meeting since the central bank scaled down its asset purchase programme by €20bn a month to €60bn a month, a step its president Mario Draghi is likely to face questions about.
The reduced quantitative easing programme is set to continue until the end of the year.
Eurozone inflation nudged above the ECB’s 2 per cent target in February for the first time in four years, a shift that put pressure on Mr Draghi to retreat from the bank’s dovish stance, but has since dropped back down to 1.5 per cent in March.
The ECB president moved earlier this month to quash speculation that the bank could raise its deposit rate back into positive territory before it ends QE. The sequencing has been hotly contested, but Mr Draghi shot down the notion of an early exit.
Last month Mr Draghi said he was looking for a more rapid rate of increase in workers’ pay before he could conclude that the rise in inflation was “self-sustaining”.
Although survey data have recently been positive, analysts at Investec said the ECB “appears to be in watch-and-wait mode on inflation”, noting that core inflation “continues to linger” below 1 per cent.
Analysts at Goldman Sachs expect the ECB to “continue to see risks to growth as tilted to the downside”.
What will tech sector earnings tell investors about US stock valuations?
Several technology bellwethers will take the spotlight this week as investors look to see whether the industry can follow the generally upbeat start to earnings season posted by US banks.
Tech companies account for 22 per cent of S&P 500 market value, by far the highest of the 11 major sectors on the benchmark index, FactSet data show. The group has led US stocks higher this year, with gains of 12 per cent, which is more than double that of the S&P 500, although it has stalled since the end of last month.
Analysts are bullish on tech: the blended forecast for earnings growth in first quarter that includes expected and reported results sits at 13.7 per cent, up from 10 per cent in the final three months of 2016.
IBM, the more than century-old company that is in the process of turning its business round, represents a case study in Wall Street’s wrath if results disappoint.
Big Blue last week faced its worst day in almost a year after it recorded a steeper than expected fall in quarterly sales and worried some analysts with a slip in its profit margin.
Alphabet and Microsoft, which each command market valuation greater than half-a-trillion dollars, are set to report on Thursday, along with chipmaker Intel. Apple, the world’s biggest company by market cap, and social media heavyweight Facebook are on deck the following week.
How much of a hit will the FTSE 100 take from a stronger pound? Will falling blue-chips make mid-cap valuations look more attractive?
It’s one of the clearest trading patterns of the year: London’s FTSE 100 has an inverse relationship with the strength of sterling. As investors approach the UK’s June 8 election, there is a growing consensus that the pound is poised to break higher into a new trading range.
UK mid-cap stocks have performed better when the FTSE 100 has faltered, at least in part because valuations on the FTSE 250 can appear more appealing when there are growing fears that the top-tier index looks to have run up too high.
Analysis from Liberum concludes that a Conservative win on June 8 “could provide the government with a strong mandate to execute a smoother and softer Brexit — Consequently this would be positive for UK domestics which could find themselves in favour again.”
Will that pattern hold during the campaign ahead and beyond?