US and European equities hit multi-year highs this week as investors brushed aside persistently high commodities prices and instead focused on positive corporate earnings and closely-watched US jobs data.
The Dow Jones Industrial Average was at a six-year high of 11,551 by midday yesterday, up 1.6 per cent on the week and within 200 points of its all-time high.
Investors had to wait until Friday for the release of the week’s most important set of economic data, the US employment report for April.
A rise of 138,000 in non-farm payrolls was far lower than the market had expected, and was interpreted as suggesting that the Federal Reserve might pause in its rate-tightening cycle after next week’s policy meeting. The US central bank is widely expected to raise rates by another quarter-point to 5 per cent.
US stocks stormed ahead, while the yield on the 10-year US Treasury bond retreated further from Wednesday’s four-year high of 5.169 per cent. The dollar fell to a fresh one-year low against the euro.
But economists pointed to underlying strength in the data.
“A weak headline, but not a weak report,” said Rob Carnell at ING. He highlighted to a 0.5 per cent rise in average hourly earnings, which took the annual growth rate to 3.8 per cent - its highest since August 2001 - and also noted the first increase in average hours worked for seven months.
“Once the market has got over its initial shock at this weak headline figure, we would expect it to begin to focus more intently on the other parts of this survey, which to us, signal that labour market strength is ongoing,” Mr Carnell said. He said that might require the Fed to reconsider whether 5 per cent is going to be enough to stem the potential inflation pressures this employment release indicates are building.
The data helped dispel a bout of rate nervousness earlier in the week after Fed chairman Ben Bernanke said he felt the markets had misinterpreted his recent testimony to Congress as being too dovish on interest rates.
The market was also boosted by strong earnings. Thomson Financial estimates about 67 per cent of the S&P 500 companies that have released first-quarter earnings so far have beaten estimates. Thomson added that first-quarter earnings growth in Europe is running at about 20 per cent.
Bernd Meyer, strategist at Deutsche Bank, said the recent share price gains in Europe in the face of rising bond yields and commodity prices and the weaker dollar signalled the equity market’s underlying strength.
Although he conceded that equities faced some headwinds in the near-term, he felt it was too early to call the top of the market yet.
“Positive earnings revisions in Europe are likely to continue; it remains difficult to show that equities are expensive; sentiment, although bullish, is not stretched; and the liquidity situation remains supportive,” he said.
The Eurofirst 300 index rose 1.5 per cent over the week to 1,398.08, its highest level for nearly five years.
The European Central Bank left its benchmark rate unchanged but dropped a strong hint that it would tighten again next month. The Bank of England also left borrowing costs on hold, although some strong economic data lent weight to the view that the next UK rate move would be upwards.
It was another week of records for the commodities markets. Gold reached a fresh 25-year peak of $684.10 an ounce yesterday, while copper touched an all-time high of $7,800 a tonne.
Oil had a volatile week. June Brent set a record high of $74.97 a barrel on Tuesday, and front-month West Texas Intermediate came within striking distance of its all-time peak of $75.35. But prices subsequently fell sharply after weekly US inventories data showed a unexpected build-up in gasoline inventories and ended the week modestly lower.
Edward Meir at Man Financial Energy noted that the oil sell-off had not spilled over to other commodities, indicating that “fund infatuation” with commodities was still strong, and that the setback in energy prices could be short-lived.