Global Weekly: Sideways markets

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After the equity recovery last week, the S&P 500 Index and the European Stoxx 600 more or less stayed at the level of last week’s close. The same goes for all the sectors, except for consumer staples, which declined by 2%, because of Walmart.

The large US retailer presented disappointing e-commerce growth figures with declining margins. As a result, share prices dropped by more than 10%. In October, Walmart had reported quarterly e-commerce growth of more than 50%. Investors expected similar numbers this time, but the increase was just 23%.  Last year, the market research company eMarketer estimated that Walmart would account for 3.6% of 2017 US e-commerce merchandise volume. This would have been an increase from 2.8% in 2016, but a fraction of Amazon's estimated 43.5% share and also below eBay's estimated 6.8% share. Walmart’s margins also dropped to a meager 3%, its lowest in years. 

In Europe, telecom company Orange reported its quarterly results. They were in line with expectations, but it is interesting to see that capital expenditures are rising again. Other telecom companies also signalled higher network investments. One of the reasons is preparations to roll-out 5G. Although the first commercial 5G offering in Europe is not expected before 2020, Verizon and AT&T in the US are planning 5G as soon as this year. 5G is expected to be at least 10-times faster than 4G. In the US, Verizon is planning to offer mobile 5G as a direct competitor for broadband internet, which would expand the total available market substantially.

Whether it will really be an alternative, needs to be seen. The trade body GSMA expects that 5G will increase annual mobile service revenue by 0.5% to 2.5% for the next 10 years. But as Orange reported, substantial investments need to be made first. With the already very slow growth and thin margins in the telecoms sector, it is going to be a challenge to keep profitability at reasonable levels.

Inflation fears in bond markets

After several months of economic data confirming that the health of economies throughout the world is improving, investors are becoming anxious as to potential events that could disrupt continued growth. The main concern continues to be inflation. This is why central bank statements and actions have again become some of the most anticipated and scrutinized news items for investment professionals.

In the US, some analysts have expressed concern that the Federal Reserve could be ‘behind the curve’, that is to say, underestimating, rising inflation – especially after the more-than-expected increase in labour costs that was published in January. The result has been an increase in uncertainty about the number of rate hikes that could occur this year.  Moreover, following a record week of Treasury bill auctions by the US government, there has been an increase in bond yields across the whole US yield curve, i.e. all bond maturities.

In Europe, the nomination of Luis de Guindos as Vice President of the European Central Bank has led analysts to consider whether the central bank could become more hawkish, that is, more likely to tighten monetary policy. He is expected to join the ECB Executive Board on 1 June, replacing Vítor Constâncio. ECB President Mario Draghi’s term ends 31 October 2019, opening the  possibility of a shift in tone at the central bank.  

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