M&A pick up
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Financial markets were rattled last week by inflation data that seemed to bury any hope of a near-term rate cut in the US. But Q1 results, especially from major tech companies, provided relief, with the S&P 500 gaining 2.7% on the week (in USD). Asian (ex Japan) markets were among the strongest performers last week, thanks largely to China, where low valuations and ‘National Team’ purchasing seemed to put a floor under markets (the MSCI China rose 8.3% in USD). The inflation data sparked only a modest sell-off in the well-prepared market for long-term US Treasuries. European bond markets were also comparatively calm, even though France’s sovereign rating came up for review. Noninvestment-grade bonds made gains and spreads narrowed in credits generally. While the US dollar declined against sterling and the euro, it made a new 34-year high against the yen after the Bank of Japan held interest rates close to zero. Gold prices dropped on the week.
POLITICS
Allies of Republican US presidential candidate Donald Trump are reportedly drafting proposals that would attempt to erode the Federal Reserve’s independence if he wins a second term in November.
KEY DATA
Preliminary figures showed US GDP grew 1.6% in Q1, down from 3.4% in Q4 23. S&P Global’s flash purchasing manager indexes (PMI) for both US manufacturing and services fell in April, indicating slower growth. On the inflation front, annual personal consumer expenditure (PCE) came in at 2.7% in March, up from 2.5% in February. Core PCE was unchanged at 2.8%.
S&P Global’s PMI indexes showed business activity improving in Europe. The composite PMI for the euro area rose to an 11-month of 51.4 in April, although services activity remains much stronger than manufacturing. In the UK, the composite PMI rose to a robust 54. Rising for the third consecutive month in April, the Ifo business climate survey also suggested the mood is brightening in Germany.
South Korea’s GDP rose 1.3% in Q1 over the previous quarter and 3.4% on an annual basis according to preliminary estimates.
MARKETS VIEW
GDP data shows US consumers are still standing. Stress is absent from markets currently, supporting sentiment. Consumer confidence and jobs data this week will be important to watch.
A takeover bid to forge the world’s biggest copper miner shows M&A activity – one of our key themes – is alive, a point underlined by an activist investor building a bumper stake in the target company. Another key theme is selecting companies that pursue stock buybacks – just as one megacap agreed to last week, while also deciding to pay its first ever dividend.
This week, the US Treasury Department details refunding plans for the coming quarter. The previous such update moved markets. We are neutral on Treasuries and overweight US investment grade debt.
The FOMC also meets this week. We expect a hawkish hold where Chair Jay Powell signals the data suggest later and fewer cuts. Fed repricing is having an impact on emerging market currencies and policies, with Indonesia last week hiking rates by 25bps to defend its currency.
