U.S. Futures, European Stocks Drift Lower as Investors Mull Earnings
Can Western indexes push past recent highs?
Christopher Whittall
Updated May 10, 2017 6:49 a.m. ET
By
Christopher Whittall
U. S. futures and European stocks edged lower Wednesday, as investors looked at the latest batch of corporate earnings for clues on whether major Western indexes can push past recent highs.
Futures markets pointed to a 0.1% opening loss for the S&P 500, after falling energy shares helped snap a three-day winning streak on Tuesday. The Stoxx Europe 600 slipped 0.1% after closing on Tuesday at its highest level since August 2015. Stock markets in Asia were mixed.
Financial markets appeared to have a muted reaction to the unexpected firing of James Comey, the director of the Federal Bureau of Investigation, though some investors expressed concern that Mr. Comey’s departure could stoke tensions between the White House and Congress.
Major stock markets have gained in recent weeks as corporate earnings have exceeded analyst expectations.
Major stock markets have gained in recent weeks as corporate earnings have exceeded analyst expectations. Photo: daniel roland/Agence France-Presse/Getty Images
U.S. futures lost some ground after the news broke, while the dollar also slipped. The WSJ dollar index, which measures the buck against a basket of 16 other currencies, was down 0.1% recently.
Major stock markets have gained in recent weeks as corporate earnings have exceeded analyst expectations. U.S. companies have largely beat estimates, with most S&P 500 companies now having reported results, according to FactSet.
With the earnings season now drawing to a close, some investors said President Donald Trump needs to deliver the corporate tax cuts he has promised for equity markets to climb further.
“We have had a very good reporting season, but...we really need the tax cuts” for equity markets to push higher, said Monica Defend, head of global asset allocation research at Pioneer Investments.
Ms. Defend said her team still owns U.S. equities, but they also hold hedges in the form of options contracts that protect against downside moves in equity and credit markets. The CBOE Volatility Index, or VIX, a widely-watched measure of investor anxiety that focuses on S&P 500 options prices, fell 1.5% on Wednesday after closing at its lowest level since 1993 earlier this week.
The VIX’s low level “is a signal [that] the market is complacent. The risk of a mistake on the political side is non-negligible,” she said, adding that Mr. Trump’s firing of Mr. Comey could create tension between the administration and Congress.
In Europe, a 0.8% decline in the construction and materials sector weighed on the broader market. HeidelbergCement AG fell 2% after the German firm reported a net loss.
Still, many investors see good reasons to be upbeat on European stocks. The European company earnings season is on track for its strongest quarter in a decade, according to a recent report from Morgan Stanley
Meanwhile, the victory of the centrist Emmanuel Macron in French presidential elections on Sunday removed the existentialist threat to the eurozone posed by the candidacy of the euroskeptic Marine Le Pen. That has allowed investors to look past political risks and refocus on economic fundamentals.
“The French elections have loomed large…as a potential restraining force on risk appetite,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets .
“Assuming that earnings growth continues...and we see this expected rebound in the hard data” then markets can continue to push higher, he added.
In Asia, South Korea’s Kospi index gave up early gains and fell 1% following the conclusion of presidential elections in the country. Moon Jae-in’s victory in those elections on Tuesday has prompted investor caution given his support for closer ties with North Korea.
In China, the Shanghai Composite Index fell 0.9% after a small gain on Tuesday snapped a five-day losing streak. Some analysts expect a high-profile regulatory crackdown to weigh on Chinese shares.
Elsewhere, Japan’s Nikkei Stock Average rose 0.3%, while Australia’s S&P/ASX 200 reversed early losses to close 0.6% higher
Demand for haven assets rose slightly on Wednesday as riskier assets slipped. The yield on the 10-year Treasury note declined from 2.405% to 2.373% recently, according to Tradeweb, reversing Tuesday’s rise. Yields move inversely to prices. Gold prices, meanwhile, gained 0.6% to $1,224 an ounce.
In commodity markets, oil prices stabilized after falling by more than 1% on Tuesday. Brent crude oil was up 1.1% recently at $49.25 a barrel.
—Ese Erheriene contributed to this article.
Write to Christopher Whittall at
christopher.whittall@wsj.com