In the United States, several key data points for GDP growth will be released this week. The first came today as March factory orders increased 2.1 percent, slightly ahead of expectations. It was also the largest increase in 8 months. Tomorrow, the March trade deficit is released. A larger than expected deficit would negatively impact first quarter GDP, while a smaller one would lead to an upward revision. Other March data out this week includes wholesale inventories, consumer credit and productivity. On Friday, the April unemployment rate will be reported.
Close attention will also be focused on Europe this week after German bund yields surged from their lows. Bond kings Bill Gross and Jeffrey Gundlach have both discussed shorting Germany bunds because when yields are below zero, you get paid to go short. Gundlach noted that if you short the German 2-year bond which yields negative 0.2 percent, use 100 times leverage and hold the short until maturity, you will earn a 20 percent return. Since these two made these comments, the 10-year German bund has declined in price, pushing up yields. German along with Swiss bonds have low yields for a reason – some investors are worried about a breakup in the euro. They’re willing to take a negative return on the bonds for the chance that a breakup in the euro delivers significant currency gains. In the short-term, a breakup isn’t a worry, but if German bond yields continue to rise, it will increase volatility in the financial markets.
The purchasing managers’ index (PMI) for China’s manufacturing sector dropped to its lowest point in a year, signaling ongoing contraction in the sector. Nevertheless, Chinese equities advanced on expectations of more monetary easing by the central bank. Chinese trade data for April comes out later this week, followed by inflation data. Commodities such as copper could see some volatility based on these numbers, but the reaction to the low PMI showed bullishness by investors because they expect more central bank intervention.
Domestically, while earnings season is still going strong, the bulk of S&P 500 companies have already reported. This week sees many mid-sized energy firms such as Andarko Petroleum (APC), Occidental Petroleum (OXY), Transocean (RIG), Diamond Offshore (DO) and EOG Resources (EOG) report. Headline generating reports will come from Tesla (TSLA) and Herbalife (HLF).
Areas to watch this week include biotechnology and small-caps, both of which sold off last week. The S&P 500 is sitting near its all-time highs. While a new record was set in April, it was barely ahead of the March high. With 8 weeks of consolidation under its belt, a bullish breakout is possible over the coming days.