Weekly wrap: Cyprus gyrations do not hinder the relentless march of the S&P 500
The last-minute deal struck at the weekend between Cyprus and international lenders provided only a brief respite from eurozone worries on Monday morning. Hours later the head of the group of eurozone finance ministers threw a spanner in the works reportedly stating that the Cypriot bank rescue model (a raid on big depositors in return for Bank of Cyprus shares) was to be used as a template for other eurozone nations. That set the tone for a difficult week for equities, in particular for Italian and Spanish stocks, while elevating the demand for core government bonds such as US Treasuries and German bunds.
US investors, however, chose to focus on the improved economic outlook for the country as several data releases over the week pointed to a modestly growing economy, while there were no signs of a change in the aggressive monetary policy of the Federal Reserve. The Dow Jones flirted with a record high during the week but the S&P 500 managed to end the holiday-shortened week on an all-time high of 1569.19, surpassing the peak reached in 2007.
In Asian markets, real estate developments hurt Chinese shares as the banking regulator issued new rules on wealth management products to increase transparency and reduce risks. A stronger yen caused Japan’s Nikkei 225 to slide over the week; however, at the end of the first quarter the index has outperformed most major equity markets.
BoJ policy meeting keenly awaited with Kuroda at the helm
On Monday, while most markets were closed for the Easter Monday holiday, data released in the US by the Institute for Supply Management (ISM) revealed that manufacturing activity grew at its slowest pace in three months, causing stock indices to shed some of their recent gains. The tone set by the US ISM factory activity was followed on Tuesday in Europe as the Markit manufacturing purchasing managers’ index for the eurozone showed activity in factories across the 17 countries contracted at a faster pace in March, with the index dropping to a three-month low of 46.8 from 47.9 in February.
For the rest of the holiday-shortened week, the major data releases to watch would be the US payrolls reports for March. Wednesday’s ADP private payrolls are expected to continue to show an ongoing trend of a modestly improving labour market, with a rise of 198K new jobs expected, while consensus expectations for nonfarm payrolls on Friday are for a rise of 190K. This would mean that the unemployment rate remains at 7.7%.
Importantly this week, three of the world’s major central banks hold policy setting meetings on Thursday, the most interesting is that of the Bank of Japan (BoJ) with its new governor, Kuroda, in the driving seat. The BoJ is widely expected to announce new and aggressive monetary policy measures under the new leadership. No policy change is expected at the other central bank meetings of the Bank of England and the European Central Bank.