Stockholm (Ekonamik) – Last week saw U.S. equity markets reach new all-time highs, even as the U.S. economy cooled down in the second quarter. The European Central Bank maintained key interest rates unchanged but hinted at more monetary stimulus.
ECB Hinting at More Monetary Stimulus, Turkey Cuts Rates
On Thursday last week, the European Central Bank (ECB) announced the decision to keep its key interest rates unchanged, with the central bank’s governing council expecting these key rates “to remain at their present or lower levels at least through the first half of 2020” to ensure the convergence of inflation to its aim. In addition, the governing council also underlined “the need for a highly accommodative stance of monetary policy for a prolonged period of time.”
As a result, the governing council has “tasked the relevant Eurosystem Committees with examining options,” which, in central bank language implies that the ECB is preparing for additional measures to stimulate the eurozone economy. ECB’s President, Mario Draghi, said at a following press conference on Thursday that “a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion.”
In a separate announcement, the ECB’s governing council has signed off on the nomination of Christine Lagarde as the central bank’s next president. Lagarde will take over from Mario Draghi, whose eight-year term as the president of the ECB ends at the end of October 2019.
In other central-bank activity, the Turkish central bank announced a 425 basis point cut in interest rates on Thursday, a move widely considered the result of political interference by the Turkish President, Recep Tayyip Erdogan. The Turkish president believes that lowering Turkey’s high inflation requires lower central bank rates.
U.S. Economics Growth Cools Down
Economic growth in the United States cooled to a rate of 2.1% in the second quarter, according to the “advance” estimate released by the Bureau of Economic Analysis. The real gross domestic product (GDP) growth declined from a rate of 3.1% in the first quarter of the year. Last quarter’s increase in real GDP reflected positive contributions from personal consumption expenditures, federal government spending, and state and local government spending. The increase was partly offset by negative contributions from private inventory investment, exports, non-residential and residential fixed investment. The cooling economic expansion supports the Federal Reserve’s move to cut its main interest rate at a policy meeting this week.
PMIs for Business Activity
Eurozone
According to the “flash” estimate, the latest Eurozone Composite purchasing managers’ index (PMI) produced by data firm IHS Markit slipped to 51.5, compared to a reading of 52.2 in June. This represents “the weakest monthly expansion of output in three months.” More importantly, “over the past six years, only four months have seen lower PMI readings.” The PMI for manufacturing, meanwhile, fell to 46.4 from a reading of 47.6 in June, registering a 79-month low.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said that “the pace of GDP growth looks set to weaken from the 0.2% rate indicated for the second quarter closer to 0.1% in the third quarter,” further emphasizing that “the manufacturing sector has become an increasing cause for concern.” According to Williamson, “geopolitical worries, Brexit, growing trade frictions and the deteriorating performance of the autos sector in particular has pushed manufacturing into a deeper downturn.”
United States
Growth of business activity in the United States edged higher in July, with the seasonally adjusted HIS Markit Flash U.S. Composite PMI Output Index increasing to 51.6 in July from 51.5 in June. Service sector companies enjoyed the strongest increase in business activity since April, which offset a downturn in manufacturing production. In July, U.S. manufacturers expanded at the slowest pace since September 2009, with the U.S. Manufacturing PMI decreasing to 50.0 in July from 50.6 in June.
Commenting on the flash PMI data, Williamson said that “the survey data indicated that the economy started the third quarter on a disappointingly soft footing.” The Chief Business Economist at IHS Markit also added that “the PMIs for manufacturing and services collectively point to annualized GDP growth of just 1.6%, up only very marginally from a lacklustre 1.5% indicated by the survey in the second quarter.”
Japan
The Jibun Bank Flash Japan Composite PMI increased to 51.2 in July from 50.8 in June, showing “a modest improvement in private business output in July, with consumption of services supporting the economy, as it has done in the year-to-date.” According to Joe Hayes, Economist at HIS Markit, “overall private sector output expanded at the fastest pace in seven months on the back of faster growth in services activity.”
Spain’s and U.K.’s Political News
Pedro Sanchez, the leader of the socialist PSOE, was unsuccessful in getting parliamentary approval on Tuesday and Thursday last week to lead a new government. The two unsuccessful confidence votes last week give Sanchez until September 23 to form a government. The socialist PSOE won most seats in the 350-seat house in a general election in April without securing a majority. With no prominent coalition partners as the liberal, pro-national unity Ciudadanos ruled out a coalition due to differences over Catalonia, Sanchez faced several months of coalition talks with the far-left Unidas Podemos to secure his government’s confirmation. Without a deal in less than two months, Spain will go back to the polls in November, marking the fourth general election since 2015.
Boris Johnson defeated Jeremy Hunt in the contest to replace Theresa May as the Conservative party leader and as Britain’s next prime minister. Johnson won the support of Conservative party members by promising that the United Kingdom will leave the European Union by October 31, with or without a deal with the European Union.
Better-Than-Expected Corporate Earnings
For the second quarter of this year, 77% of the S&P 500 companies that already reported their quarterly results registered a positive earnings-per-share surprise and 61% reported a positive revenue surprise. According to FactSet, around 44% of all companies in the S&P 500 reported actual results. The blended earnings decline for the S&P 500 in the second quarter equals 2.6%. The blended estimate combines actual results for companies that already reported and estimated results for companies yet to report. The blended revenue growth, meanwhile, reached 4.0%.
Amazon.com announced its financial results for the second quarter that ended June, reporting an increase in net sales of 20% to $63.4 billion from $52.9 billion in the second quarter of last year. Operating income increased to $3.1 billion in the second quarter from $3.0 billion in the same quarter of last year, missing analysts’ expectations as the company incurred higher costs associated with the transition to one-day shipping for Prime – Amazon’s membership program. Amazon posted a quarterly profit of $2.6 billion in the second quarter, up from $2.5 billion in the second quarter of 2018 but narrowly missing the $2.8 billion analysts had expected.
Last week, Facebook reported better-than-expected financial results for the quarter that ended June and announced a $5 billion settlement with the Federal Trade Commission following the 2018 Cambridge Analytica scandal. Facebook booked revenues of $16.89 billion for the quarter, up 28% year-over-year and topping analysts’ expectations. Facebook’s operating profit margin took a hit as a result of legal expenses and fines associated with the FTC privacy investigation. The operating margin decreased from 44% in the second quarter of last year to 27% for this year’s second quarter. Facebook’s daily and monthly active users increased 8% year-over-year in line with what analysts had expected. The company’s daily active users were 1.59 billion on average for June.
Alphabet reported revenues of $38.9 billion for the second quarter of 2019, up 19% year-over-year and beating analysts’ expectations of $38.2 billion. Google’s parent company booked a second-quarter net income of $9.95 billion, compared to $3.20 billion in the second quarter of 2018. Following the release of its financial results and announcing plans to use $25 billion for repurchasing shares, Alphabet enjoyed its best day since July of 2015 and saw its market capitalization increase by more than $75 billion to reach $864.5 billion on Friday.
Other companies that presented their quarterly financial results last week include McDonald’s Corporation, Twitter, Colgate-Palmolive Company, Starbucks Corporation, among others.
Equities Reaching New Highs, Gold Inching Higher, the VIX at Low Levels
Another rally on Friday left the S&P 500 higher by almost 2% for the week and 21% year-to-date. The technology-heavy Nasdaq Composite Index outperformed, helped by the surge in Alphabet shares on Friday. The Nasdaq gained 26% year-to-date through Friday. European equity markets also rose last week, helped by positive earnings reports and hints from the ECB of more monetary stimulus. The pan-European STOXX Europe 600 Index, the FTSE 100 Index of the U.K., the export-heavy German DAX and Italy’s FTSE MIB Index all posted gains last week.
Japanese and Chinese stocks also advanced for the week. The Nikkei 225 Stock Average gained nearly 1% last year and was up 8% year-to-date. The Shanghai Composted Index added below 1% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, was up more than 1% last week.
Gold recorded a modest gain last week after surpassing $1460 for the first time since May 2013 during the previous week. WTI crude oil held $56 a barrel, and U.S. Treasury yields edged lower. The CBOE Volatility Index, known as the VIX or the stock markets fear gauge, closed above 12 on Friday, its lowest weekly finish since April.
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