Global stocks posted modest gains, supported by rising oil prices and aggressive monetary stimulus measures. Energy and materials stocks rallied as signs of improving demand from China sent commodity prices sharply higher. Information technology stocks declined on disappointing first-quarter earnings at some bellwether companies. Bonds advanced and the U.S. dollar declined against the euro, the yen and most other currencies.
Index Returns (Monthly)
U.S. stocks were flat as investors weighed signs of a stabilizing world economy and rising commodity prices against underwhelming quarterly earnings. The Standard & Poor’s 500 Composite Index was essentially unchanged. The Dow Jones Industrial Average rose 1%, but the technology-heavy Nasdaq composite fell 2%.
Six of 10 S&P sectors had positive returns. Energy shares overall posted a 9% gain due to higher oil prices. An agreement with lenders to maintain a $4 billion revolving credit facility helped shares of Chesapeake Energy rise 67%. Meanwhile, Southwestern Energy shares increased on higher-than-expected revenue in the first quarter and speculation that lower natural gas production in the coming months would lift prices. Strong quarterly earnings reports boosted the health care sector 3%. Promising clinical trial results for its artificial heart valve helped Edwards Lifesciences rise more than 20% and expanded use of cancer treatment drugs in the first quarter pushed shares of Bristol-Myers Squibb 13% higher.
Materials stocks advanced 5% and financials climbed 3%. DuPont and Dow Chemical, which are awaiting regulatory approval to merge, saw their shares rise 4% and 3%, respectively, after DuPont reported strong quarterly earnings and raised its outlook for the year. Despite lower trading revenue and additional write-offs of energy sector loans, financial titans Bank of America and JPMorgan Chase beat quarterly earnings expectations. Sizeable cost-cutting in the first quarter helped propel both stocks 8% higher in April.
The information technology sector fell 5% as bellwether companies reported lower-than-expected profits amid weak consumer demand. Microsoft and Apple dropped 10% and 14%, respectively, following disappointing quarterly earnings reports. Microsoft lowered its earnings forecast for the second quarter and Apple reported a decline in quarterly revenue for the first time in over a decade. Meanwhile, shares of Alphabet (formerly Google) suffered their worst fall in nearly four years after the company forecast a significant slowdown in advertising revenue growth for 2016 and said the impact of the strong dollar was worse than expected during the first quarter.
Lower inventories and signs of stabilizing global demand sent most commodities prices higher. West Texas Intermediate crude oil prices climbed 20% amid falling U.S. production, a decline in oil inventories and stabilizing global demand. Copper prices advanced for the third straight month. Although gold futures rose a modest 4%, Newmont Mining shares continued to surge on higher first-quarter output and lower cost estimates for 2016.
In early April, the Treasury Department announced new rules aimed at curbing tax-incentive mergers and acquisitions. The regulations caused Pfizer and Ireland-based Allergan to terminate their proposed $160 billion megamerger after the companies found the deal would offer fewer tax advantages. In spite of the new rules, M&A activity continued in April, albeit at a slower pace than in 2015. The health care sector was particularly active: Abbott Laboratories announced a $25 billion deal to acquire St. Jude Medical; pharmaceutical company Sanofi proposed a $9 billion takeover of Medivation, which was rejected; and drugmaker AbbVie offered $6 billion to purchase cancer treatment developer Stemcentrx.
U.S. economic data was generally weaker. Real gross domestic product increased only 0.5% in the first quarter as private investment fell and consumer spending growth slowed. Housing starts, new home sales and retail sales all decelerated in March. The labor market continued to be a bright spot, however, as payroll employment increased by 215,000 in March and the labor force participation rate increased for the fourth straight month. During its April meeting, the Federal Reserve opted to not increase interest rates, saying that it continues to closely monitor inflation and global economic conditions to determine the timing of further rate hikes.
In bond markets, the Barclays U.S. Aggregate Index rose 0.4%. The yield on the benchmark 10-year Treasury note increased 5 basis points to 1.83%. Investment-grade corporate spreads to Treasuries tightened 17 basis points to 146 basis points, driven in part by rising oil prices. The boost for the energy sector also helped high-yield bonds gain 3.9%. Investment-grade corporates rose 1.4%. Treasury Inflation Protected Securities posted a modest 0.3% gain. Municipal bonds notched a 0.7% return. Corporate spread tightening was also driven by relatively low new issuance. Large banks were among the more notable issuers during the month. Bank of America sold $5 billion of bonds, including $2.5 billion of 10-year notes and $2 billion of five-year notes with coupons of 3.5% and 2.625%, respectively. Credit Suisse, Morgan Stanley, Goldman Sachs and Wells Fargo also sold U.S. bonds during the month.
European stocks rose modestly, supported by better-than-expected economic data and heightened central bank stimulus measures. The eurozone economy advanced at a rate of 0.6% in the first quarter and unemployment fell to a four-year low of 10.2%. Lending activity also picked up slightly in the 19-member currency bloc, a development that some officials attributed to the European Central Bank’s ramped-up asset-purchase initiative. Overall, the MSCI Europe Index gained 2%.
Europe’s struggle with deflation continued, however, as consumer prices in April declined 0.2%, remaining far behind the ECB’s target of roughly 2%. The ECB launched a series of policy actions in March that included reductions in the central bank’s lending rates and an increase in its bond-buying program to €80 billion a month, from €60 billion previously. ECB officials held interest rates steady in April, but stressed that the central bank stands ready to do more if necessary.
“Brexit” fears dissipated somewhat amid indications that U.K. voters are likely to reject a ballot proposal to abandon the European Union. The June 23 referendum has raised concerns about EU stability, but markets appear to be discounting the measure. After falling precipitously in the first quarter, the pound rallied 2% against the U.S. dollar in April. A growing chorus of voices has warned that a Brexit scenario would be disastrous for the European economy. Standard & Poor’s put the U.K.’s triple-A credit rating on watch with a negative outlook, citing the uncertainty caused by the ballot measure.
Energy stocks led markets higher, gaining 7% on rising oil prices and talk of production freezes in key oil-producing regions. Shares of Total rose sharply after the French oil giant reported a smaller-than-expected decline in first-quarter profit. Shares of BP, Eni and Royal Dutch Shell also enjoyed significant gains amid signs of stabilization in global oil prices following a precipitous slide that began in the summer of 2014.
Materials stocks advanced on rising commodity prices, driven largely by indications that demand from China may be better than previously thought. Mining companies rallied, including Rio Tinto, which bolstered investor sentiment by announcing that it would buy back $1.4 billion of bonds in a bid to reduce its debt load. Mining rivals Anglo American and BHP Billiton enjoyed double-digit share price gains as base and precious metals experienced one of the strongest rallies since 2010.
Financial stocks also bounced back after a difficult first quarter. The sector as a whole advanced on better-than-expected earnings and a rise in lending activity across the eurozone. Shares of Banco Santander advanced after the Spanish bank reported first-quarter profit of €1.63 billion — lower than the same period last year but higher than analysts had predicted. Meanwhile, telecommunication services and information technology stocks retreated, losing 3% and 4%, respectively.
In fixed-income markets, European corporate bonds rose amid the ECB’s aggressive stimulus program, which has pushed down financing rates across the eurozone. In addition to sovereign debt, the ECB has pledged to buy corporate bonds under the expanded program announced in March. In a sign of the times, consumer goods giant Unilever sold €1.5 billion of bonds at rock-bottom rates, including four-year maturities with a 0% coupon. Government bond yields moved higher after hitting near-record lows in March. The yield on Germany’s benchmark 10-year note rose 13 basis points to end the period at 0.28%.
Japanese equities were roughly flat. The Bank of Japan disappointed investors by deciding against any fresh market stimulus, erasing equity gains from early in the month and sending the Japanese yen sharply higher. The currency rose 5% against the U.S. dollar in April and is up 12% for the year. The MSCI Japan Index declined slightly, while the MSCI Pacific Index edged up 1%.
Poor economic data highlighted the economy’s struggle to escape a deflationary and slow growth environment, which investors anticipated would lead to more monetary stimulus at the Bank of Japan’s April meeting. Japan’s core CPI fell 0.3% from a year earlier, its steepest drop in three years. Prices excluding food and energy rose 0.7%, although that was a slower rate than the previous month. Tepid inflation and wage growth have limited consumer expenditures. Household spending dropped 5.3% from a year earlier, while retail sales declined 1.1%. Industrial production grew 3.6% from February, but forecasts for future months remain uneven as the country copes with the aftermath of a series of destructive earthquakes on Kyushu. However, the job market remains a consistent bright spot. The unemployment rate fell to 3.2%, matching its lowest level in 19 years.
Consumer discretionary stocks struggled as exporters were hurt by the rising yen. Shares of Mitsubishi Motors plunged 47% after the company admitted to manipulating fuel efficiency test data for four domestic models. Domestic orders declined sharply the week following the scandal, and investors feared the transgression would also lead to hefty fines and compensation costs. Shares of automakers Toyota, Honda and Nissan all traded lower. Fast Retailing shares retreated 19% after management cut its profit forecast to a five-year low, citing a stronger yen and weak demand for winter apparel. Wireless giant SoftBank climbed 12% after its subsidiary Sprint signed two funding deals representing more than $3 billion in liquidity that would help it meet its debt payments. Rival KDDI also gained. Several technology companies advanced, including electronics manufacturer Keyence, which rallied after reporting record profits in the first quarter.
Australian equities rose 4%. Several stocks within the materials sector gained, as commodity prices rebounded strongly. Shares of miners BHP Billiton, Rio Tinto and Fortescue Metals soared more than 20%. Qantas Airways declined 21% after lowering its planned capacity growth due to weaker-than-expected demand from domestic travelers. The MSCI Hong Kong Index rose 1%. Shares of real estate firms rebounded after a sluggish first quarter. However, shares of Macau-based casino operators slipped.
Emerging markets stocks advanced for a second consecutive month. The MSCI Emerging Markets Investable Market Index rose 1%, following a strong rally in March, as accommodative monetary policies, rising commodity prices and a weaker dollar continued to support demand for developing-country stocks. The energy sector led gains, followed by materials. The technology sector declined. Most emerging markets currencies appreciated against the U.S. dollar, but at a slower rate than prior months. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, gained 1.9%; local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, rose 2.6% in dollar terms.
Brazilian stocks gained further momentum as the country’s legislative body moved closer to impeaching President Dilma Rousseff. The continued recovery in oil and a number of other commodities also supported Brazilian assets. The MSCI Brazil IMI increased 10%, while the real rose 3% against the dollar. The index has surged 41% year to date, making it one of the best-performing emerging markets this year. Top gainers for the month included iron ore miner Vale and state-owned oil producer Petrobras. Elsewhere in Latin America, the MSCI Peru IMIclimbed 14% ahead of a June presidential election, putting the index’s year-to-date gain at 44%. Mexican stocks were flat amid government budget cuts to cope with lower oil prices and sluggish manufacturing exports. Moody’s also reduced its outlook for Mexico to negative from stable.
Russian equities continued to climb higher amid strong gains for Brent crude, which rose 21.5% for the month. The MSCI Russia IMI rose 8%, led by energy companies Gazprom and Lukoil. Sberbank, Russia’s biggest bank, also advanced. Further supporting equities was an order by the Russian government for state-owned companies to pay at least 50% of their 2015 earnings in dividends. Such a move would help shore up the country’s ailing finances, which have been hurt by international trade sanctions and prolonged weakness in oil prices. The ruble appreciated 3% against the dollar.
Chinese stocks held their ground amid encouraging economic data and signs government stimulus measures were helping the economy. The MSCI China IMI finished unchanged. On the economic front, gross domestic product rose 6.7% during the first quarter, while exports increased 11.5% in March from the year earlier. Property sales also increased, helped by supportive government policies that include lower taxes on home purchases. On the other hand, Standard & Poor’s cut its outlook on China to negative from stable, indicating that economic and financial risks are growing. S&P also noted that China’s shift to a consumer-led economy would take longer than it had anticipated.
Other Asian markets were mixed. The MSCI India IMI rose 1% as the country’s central bank cut its benchmark interest rate in a widely anticipated move. Taiwanese equities fell 5%, weighed down by Taiwan Semiconductor, which forecast weaker-than-expected revenue for the second quarter. Stocks in Indonesia fell 1%, while South Korean equities were unchanged.
Turkish stocks generated further gains despite geopolitical turmoil. The MSCI Turkey IMI rose 4%, following strong gains in March as investor appetite increased for riskier emerging markets assets. Turkish dollar-denominated bonds returned 4%. Turkey’s economy grew a better-than-expected 5.7% during the fourth quarter of 2015, fueled by increased consumer spending. Murat Çetinkaya was also named the country’s new central banker. His appointment helped alleviate investor worries about a drastic change in monetary policy. Meanwhile, Turkey’s central bank cut its overnight lending rate by 50 basis points.
In debt markets, Argentina sold $16.5 billion of dollar-denominated debt, marking the largest bond sale ever by a developing nation. Under its new political leadership, Argentina returned to the international debt markets after a 15-year absence caused by a previous default and lawsuits with creditors. South Africa raised $1.25 billion in a dollar-denominated bond sale, its first such deal in two years. In the corporate market, state-owned Chinese energy firm Sinopec sold $3 billion in dollar bonds. Kia Motors, South Korea’s second-largest automobile manufacturer, raised $700 million in a dollar-denominated bond sale.