Still Magnificent

Here are some of the biggest stories from last week:

• Business activity in the eurozone rose to its highest level in almost a year.
• The US economy grew by less than expected last quarter.
• Four of the “Magnificent Seven” stocks reported earnings, with the results mostly coming in better than expected.
• Bullish bets on the dollar in the futures market surged to their highest level since 2019.
• Gold’s extraordinary rally is mainly down to relentless demand from China.

Dig deeper into these stories in this week’s review.

Macro

The eurozone got some good news this week, with new data showing business activity in the bloc expanding at its fastest pace in almost a year, suggesting that the region’s economy is emerging from its recent stagnation. The composite PMI for the eurozone rose to an 11-month high of 51.4 in April, up from 50.3 a month earlier and stronger than the 50.7 expected by economists. That marked the second month in a row that the reading came in above the 50 mark that separates expansion from contraction, with growth in the services sector offsetting weakness in manufacturing in April. The data will likely reassure officials at the European Central Bank that the region is still on track for a “soft landing”, as the economy avoids a recession while inflation falls steadily towards the bank’s 2% target.

Over in the US, the world’s biggest economy grew by less than expected in the first three months of the year while a key measure of underlying inflation jumped. GDP increased at a 1.6% annualized rate last quarter from the one before – the slowest pace of growth in almost two years and well below the 2.5% forecasted by economists. Meanwhile, the core personal consumption expenditures index, which is closely watched by the Fed as a gauge of underlying price pressures, increased by more than expected, from 2% to 3.7% – the first quarterly acceleration in a year. That was arguably the greater concern from the report, with the inflation jump likely renewing pressure on the Fed to further delay any interest rate cuts.

Stocks

Four of the “Magnificent Seven” stocks reported their latest earnings this week, with the results mostly coming in better than expected. Tesla reported its first revenue decline in four years due to decreasing sales volumes and prices of its EVs. But investors looked past the revenue slump, focusing instead on the firm’s commitment to launch a more affordable EV next year (a Reuters report earlier this month had casted doubts on the cheaper “Model 2”). Meta had a worse time trying to convince investors of its plans: though it announced earnings that beat forecasts last quarter, it said that it will spend billions of dollars more than expected this year – fueled by investments in AI.

In contrast, Microsoft and Google-owner Alphabet sent a clear message to investors on Thursday: their spending on AI and cloud computing is already paying off. Both companies trounced Wall Street estimates with their latest quarterly results, lifted by a surge in cloud revenue – fueled in part by booming use of AI services. Adding to the good news, Alphabet announced its first-ever dividend, which was widely cheered by investors.

Currencies

Investors entered the year predicting that the US dollar would fall. Instead, a Bloomberg index of the currency has gained 4% this year, reflecting advances against all major developed and emerging-market counterparts. And now, a mighty greenback is increasingly looking like it’s here to stay, sending ripples throughout global markets. That strength is mainly down to three main things.

First, the resilience of the US economy, which has avoided the downturn many had anticipated. Instead, after expanding by 2.5% in 2023, the world’s biggest economy is set to grow by 2.7% this year – more than double the rate of any other G7 country, according to the International Monetary Fund. This “US exceptionalism” is boosting demand for the country’s financial assets and, in turn, the dollar.

Second, America’s inflation problem is proving to be quite stubborn, with the last few prints all coming in hotter than expected. That’s pushing traders to significantly scale back their bets for interest rate cuts by the Fed, boosting the dollar. After all, higher-for-longer interest rates increase the currency’s appeal among international savers and investors. Third, rising geopolitical tensions – especially in the Middle East and Ukraine – are pushing investors toward safe-haven assets like gold and, you guessed it, the dollar. 

Traders reckon that the greenback has further room to appreciate, amassing huge bullish positions on the dollar against eight other major currencies in the futures markets. Their combined net positions are currently the highest since 2019 – a stark contrast to the start of the year, when their net positions were negative (i.e. they were betting that the dollar would fall).

Commodities

With traders slashing their bets for interest rate cuts this year, you would’ve expected gold – which pays no income – to perform poorly. But that hasn’t been the case, with the price of the metal rising almost 15% so far this year and hitting a new record high earlier this month. At the heart of this extraordinary surge is relentless demand from China, where consumers, investors, and even the central bank are flocking to the safe-haven asset amid uncertain times.

Jewelry demand in the country increased by 10% last year, reaching 630 tons and overtaking India as the biggest global buyer. Meanwhile, Chinese investors, who are facing a property crisis, a falling yuan, a volatile stock market, and tumbling bond yields, bought 280 tons of gold last year – 28% more than in 2022. And that’s despite them paying higher prices for the metal. See, as a major importer, gold buyers in China often have to pay a premium over international prices. And that markup has surged recently, with the local price of gold in Shanghai costing $35 more on average than internationally over the past year – much higher than the historical premium of just $7.

China’s central bank has also been on a buying spree, snapping up the metal for 17 straight months – its longest-ever run of purchases – in a bid to hedge against inflation and diversify its reserves to reduce its exposure to the US dollar. That makes the People’s Bank of China the biggest buyer among all the central banks favoring gold lately.

Some analysts reckon that there’s room for demand to grow even further. After all, purchases by China’s central bank show no signs of stopping. And with the country’s property and stock markets still in the doldrums, Chinese investors could continue plowing money into gold. Further fueling the rally are Chinese speculators, who are flocking to the futures markets to place huge bets on rising prices. Consider this: long gold positions held by traders on the Shanghai Futures Exchange surged to a record of 324,857 contracts earlier this month. That’s equivalent to 325 tons of the metal, or 7% of annual global demand.

Next week

• Monday: Eurozone economic sentiment (April).
• Tuesday: Japan industrial production and retail sales (March), Japan unemployment (March), eurozone GDP (Q1), eurozone inflation (April), US consumer confidence (April), China PMIs (April). Earnings: Amazon, 3M, Coca-Cola, Eli Lilly, McDonald’s, Starbucks, AMD, Mondelez, PayPay.
• Wednesday: Fed interest rate announcement, US job openings and labor turnover survey (March). Earnings: Qualcomm, Mastercard, Pfizer, Kraft Heinz, Estee Lauder.
• Thursday: US trade balance (March). Earnings: Apple, Coinbase, Moderna, Amgen, Novo Nordisk, Block.
• Friday: Eurozone unemployment (March), US labor market report (April).