Vive La France

Originally published by BetaShares

The Week in Review

• Fears over North Korea hurt sentiment early last week as did lingering concerns over the French Presidential election (happily resolved overnight!) but this was countered by an encouraging start to the US earnings reporting season. And adding a cherry on top were comments from US President Trump on Friday indicating a “phenomenal” tax cut plan will be announced on Wednesday (US time) this week.

• But while the US S&P 500 finished up 0.8% last week, US bond yields and the $US stubbornly failed to rebound. Oil slumped, meanwhile, as OPEC’s promise of an extension to its production cut agreement is being countered by increasing evidence that this has only encouraged a stronger US shale oil response.

• Closer to home, there was little in major market moving news, with the RBA minutes – as expected - displaying a fairly neutral policy outlook. Iron ore prices continued to fall, which contributed to further weakness in resource stocks. Housing bubble fears persisted - which did not help banks.

Likely Highlights in the Week Ahead

• Provided nuclear war with North Korea continues to be averted, attention early this week is likely to focus on positive news from the French Presidential election. Having won the right to run in the second round of elections in two weeks, centrist (and seemingly economic rationalist) Emmanuel Macron now seems very likely to beat out hard-right populist Marine Le Pen to become the next French President - at only 39 years of age! The European Central Bank also meets later this week, with President Mario Draghi likely to try hard to downplay market talk of a tightening in policy anytime soon – lest it lead to undesired euro strength.

• Other positive news – though the degree to which remains unclear – will be Trump’s long anticipated tax cut plans. The only possible dampener might be a very busy week for US earnings results, though so far at least these are have been modestly pleasing.

• Locally, the focus will be on Thursday’s March quarter consumer price index result. With annual underlying inflation expected to lift from around 1.5% to 1.8% (helped by the unusually low March quarter result 2016 dropping out of the calculations), the CPI result should be consistent with the idea that underlying inflation has at least bottomed, and may be finally moving back toward the RBA’s 2-3% target band. Indeed, headline annual inflation is expected to lift to 2.2% - a return to the target band for the first time in 2.5 years.

The Wrap

• Global equities continue to hold up relatively well, with a number of positive influences – the French Presidential election, Trump’s tax cuts, and the US earnings season – all working in their favour. The main negatives remain high outright price- to-earnings valuations and the lingering risk of a North Korean shock.

• Also of interest is the fact that the US dollar and bond yields failed to rebound much last week in what otherwise appeared a “risk on” environment. If the risk-on environment is really back in vogue, however, we should at least expect higher bond yields soon, which should place some downside pressure on valuations. In turn, that will make continued decent equity gains ever more reliant on solid earnings growth – which so, far at least, seems to be the case.

• In turn, rising bond yields will particularly favour global banks. US tax cuts generally - and especially plans to encourage US firms to bring profits back from offshore (which might fund share buy backs) - would also favour technology and health care stocks.

Have a great week!