The dollar eased and global equity markets fell yesterday after a surprise drop in German industrial output cooled a rally that sent various stock indexes to record highs last week and as investors turned to corporate earnings for the second quarter.
German industrial output fell 1.8 per cent in May from April in the biggest drop in more than two years, a decline that confounded expectations of unchanged production.
The advent of the second-quarter earnings season and a reassessment by some Wall Street economists as to when the Federal Reserve is likely to begin raising interest rates after last week’s US strong employ-ment report also weighed on sentiment.
Economists at Goldman Sachs brought forward their expectations of the first rate increase to the third quarter of 2015 from the first quarter of 2016, following similar actions from some other banks last week.
Wall Street retreated from record highs hit on Thursday by the S&P 500 and Dow industrials, while MSCI’s all-country world index also slipped after hitting a record the same day. US markets were closed on Friday for the Independence Day holiday.
The blended earnings-per-share growth rate for the S&P 500 in the second quarter is 6.2 per cent, according to Thomson Reuters. Of the 22 companies in the S&P 500 that have reported earnings so far, 63.6 per cent beat analyst expectations, in line with a typical quarter over the past 20 years.
“This earnings season has a lot of pressure on it, since we need to see significant revenue growth to offset weakness in the first quarter,” said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.
MSCI’s ACWI was down 0.44 per cent, while the pan-European FTSEurofirst 300 index of leading regional shares fell 0.9 per cent to close at 1,381.64. The decline in German industrial output took a toll on sentiment.
“It rings alarm bells across Europe that the recovery is not a straight line upwards,” James Butterfill, global equity strategist at Coutts, said.
The Dow Jones industrial average fell 64.67 points, or 0.38 per cent, to 17,003.59.
The S&P 500 lost 9.57 points, or 0.48 per cent, to 1,975.87, and the Nasdaq Composite dropped 32.379 points, or 0.72 per cent, to 4,453.546.
The US dollar fell against the euro as investors speculated about when the Fed is likely to begin raising interest rates.
The dollar has gained and the Treasuries yield curve has flattened since the US Labor Department reported on Thursday that nonfarm payrolls increased by 288,000 jobs in June and the unemployment rate fell to 6.1 per cent from 6.3 per cent in May.
The euro was last up 0.1 per cent against the dollar at $1.3605. The dollar was down 0.26 per cent versus the Japanese yen at 101.83.
The 10-year US Treasury note rose 8/32 in price to yield 2.6174 per cent.
Oil prices fell. Brent was down 39 cents at $110.25 a barrel.
US oil fell 75 cents to $103.31 a barrel.