Markets rose on positive corporate earnings and an increase in consumer spending – both of which improved investor confidence in the strength of the global economy. Over 80% of S&P 500 companies delivered earnings that beat estimates.
One noteworthy exception were tech stocks which struggled. Google’s holding company, Alphabet, posted below-expected earnings, causing tech stocks to decline and while Jeff Bezos made headlines this week after surpassing Bill Gates as the richest man in the world with a net worth of $81 billion mostly attributed to his 17% stake in Amazon, this may be short-lived given the Company’s lackluster second quarter which included revenue that missed analysts’ forecasts by more than a dollar a share! Facebook managed to exceed estimates as they look to incorporate native ad content into their messaging platform, which drove their stock higher.
Healthcare closed the first 4 days of the week down almost 2% in light of the Senate passing a motion to discuss changes to the Affordable Care Act and parts of the new healthcare bill. Oil is sitting near an 8-week high after a decline in U.S. inventories and OPEC’s decision to curb production numbers.
European markets rose due to largely to increasing confidence in German businesses. This could perhaps be attributed to Deutsche Bank’s recent decision to move $350 billion from the UK to Frankfurt. This represents almost a fifth of their balance sheet and the largest single-company cash outflow since Brexit.
It was announced this week by Andrew Bailey, Chief Executive Officer at the U.K.’s Financial Conduct Authority, that LIBOR will be phased out by 2021. LIBOR is the key interest-rate indicator that is used as the base rate for nearly $350 trillion in securities. The issue with LIBOR is it relies on the opinions of industry insiders setting the rate based upon daily estimates of interbank lending, even in some markets that see very few, only double-digit number of transactions a year. ͞LIBOR is trying to do too many things: “it’s trying to be a measure of bank risk and it’s trying to substitute for interest-rate risk markets where really it would be better to use a risk-free rate,” said Bailey.
More big news (or the absence of big news) occurred at the Fed this Wednesday when Fed policy-makers decided to leave rates unchanged and tempered their outlook for rate increases the remainder of the year with an increasingly dovish stance.
The US dollar is falling at a rate not seen in 15 years, US Treasury bond yields continue to decline, credit spreads continue to tighten, and Wall Street has remained exceedingly bullish. So isn’t now the time to raise rates?
There’s one key factor missing, and that’s inflation. Fed Chair Janet Yellen is cautious to tighten rates as we’ve seen sluggish inflation fall below the Federal Reserve’s 2% goal. With that said, having higher rates provides the Central Bank with ammunition to fight against the next economic downturn, so we can expect the Fed to begin shrinking its $4.2 trillion bond portfolio later this year.