Wall Street drops from highs as investors weigh global economic data

American stocks pulled back from record highs as investors weighed a mixed economic picture of strong recovery in the US, a technical recession in the eurozone and slowing growth in China.

The blue-chip S&P 500 index, which crossed 4,200 to close out Thursday at an all-time high, dropped 0.7 per cent by the end of trading in New York on Friday. The technology-focused Nasdaq Composite slid further throughout the day, down to 0.9 per cent at the close. The Dow Jones Industrial Average fell by 0.6 per cent.

The eurozone economy contracted 1.8 per cent in the first three months of this year, compared with the first quarter of 2020, data released on Friday showed. Economists surveyed by Reuters had forecast a deeper 2 per cent decline, but the pandemic-scarred 19-nation eurozone economy has now recorded two consecutive quarters of contraction, technically entering a recession.

China’s manufacturing activity gained momentum in April, according to a purchasing managers’ index released by Caixin and IHS Markit on Friday. But while the index bounced back from an 11-month low in March, the reading of 51.9 for April was well below levels recorded for much of last year.

Brent crude futures dropped 1.9 per cent to $67.25 a barrel on Friday afternoon following the China and eurozone data. The moves came a day after the US reported a 6.4 per cent annualised rise in gross domestic product for the first quarter, beating analysts’ expectations for a 6.1 per cent increase.

“The market has a lot of conflicting newsflow to contend with,” said Georgina Taylor, multi-asset fund manager at Invesco.

“The bar is now high for what will provide continued momentum in equities . . . We’ve had a big advance on the back of the US recovery and strong earnings from market leaders,” she added, after a host of US companies including large technology and oil groups reported surging profits.

Jonathan Golub, chief US equity strategist at Credit Suisse, said businesses’ recovery from the pandemic was unlikely to have peaked, arguing that analysts looking ahead to the second quarter were probably not optimistic enough.

“In the early stages of an economic cycle, analysts tend to underestimate operating leverage,” he said, referring to the profit-magnifying effects of sales growing while businesses’ cost bases remain stable. Misreading this effect often lead to analysts needing to revise earnings forecasts higher in “a trend that can last two to three years”, he added.

As April draws to a close, investors will probably shift their focus to valuation, says Lauren Goodwin, director of multi-asset solutions at New York Life Investments. After a month-long tear in US stocks, clearer winners and losers will emerge “both in terms of asset allocation and within each asset class security selection”.

She added that she expected to see more volatility and inflation on the horizon, “not just because we’re early in the economic cycle, but because of the nature of this particular crisis and the way that pent-up demand is likely to surge in the coming months”.

In Europe, stocks looked set to end the week flat, with the regional Stoxx 600 index adding 0.1 per cent to 439 points, barely moving from this time last week.

In debt markets, the benchmark US Treasury bond yield was steady at just under 1.63 per cent. The yield, which moves inversely to the price of the debt, has climbed from about 0.9 per cent at the start of the year as a brightening outlook for the US economy sparked bets on a jolt of inflation, which erodes the returns from fixed-interest securities such as bonds.

Germany’s benchmark Bund yield fell by 0.02 percentage points to minus 0.21 per cent but remained around its highest since early March. German consumer prices rose 2.1 per cent in April compared with the same month last year, data released on Thursday showed, pushing slightly above the European Central Bank’s target for the eurozone.

The ECB, however, has echoed the view of the US Federal Reserve that any sharp increases in inflation this year will prove transient, caused by factors such as a recovery in oil prices after they collapsed during the pandemic in spring last year.

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