April 20, 2015 —On Wednesday, Mario Draghi, President of the European Central Bank (ECB), managed to sound increasingly bullish about Europe’s improving economic outlook at his regular press conference. At the same time, he shot down recent rumors of an early exit from the quantitative easing (QE) program which the ECB launched in early March. The speculation of an early end to the asset-purchase scheme has focused not only on a very weak euro currency, potentially creating an inflation overshoot, but just as importantly on concerns that the ECB will struggle to find enough eligible debt to complete the program. For example, German Bunds with maturities of up to eight years are trading with negative yields. And bonds from seven other European countries also now have negative yields. But the ECB President could find few signs of asset bubbles that could create financial instability. The key takeaways from Draghi’s comments were a growing confidence that the European QE program is improving the outlook for growth and that the ECB remains committed to maintaining the program through at least September 2016.
Volatility returned to markets in a big way on Friday, as China’s securities regulators announced new policies to allow the short-selling of stocks and to restrict the use of margin trading accounts. Fears that the odds of Greece exiting the Eurozone are rapidly increasing also contributed to Friday’s swoon, which sent the major U.S. indices down more than 1% for the week. Earnings season kicks into high gear in the coming week, and the relatively small sample of firms which have already reported first-quarter earnings has been encouraging. Of the approximately 11% of S&P 500 companies that have reported earnings so far, 77% have beaten consensus estimates versus the five-year average of 73%, according to data from FactSet. Even companies that have missed earnings have seen their stocks rise by 0.9% from the two days before earnings to the two days after, which compares favorably to an average decline of 2.3% over the past five years. At least so far, it appears that first-quarter earnings in aggregate could manage to exceed very low expectations. In addition to the big wave of earnings releases this week, economic data set to be released includes existing home sales on Wednesday and durable goods orders on Friday. The past week brought more disappointing data on the U.S. economy, including larger-than-expected drops in industrial production and the Empire State Manufacturing Survey. A continuation of weak data could soon call into question the second-quarter growth rebound that many economists are expecting.