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Daily Agenda: U.S. Bull Market Shows Signs of Exhaustion

Atlanta Fed targets zero growth for Q1; EU stares down Google in antitrust case; GoDaddy IPO shows strong performance.

As first-quarter 2015 earnings season comes into view, there are signs that many investors have concluded that the multiyear bull market for U.S. equities may be reaching its end. According to data collected by financial data company FactSet, year-to-date earnings estimates for the S&P 500 in aggregate have fallen by more than 8 percent. Consensus forecasts also show a decline in first-quarter earnings of more than 4 percent, with anticipated shortfalls across all sectors. This represents the largest downward revision since the first quarter of 2009. With valuations remaining high on a historical basis and macro factors impacting specific sectors — particularly the leveraged energy segment, which has been brutalized by collapsing oil prices in recent quarters — there is a palpable atmosphere of lessened expectations. One bright spot for the remaining bulls is the increased pace of buybacks and mergers as corporate coffers remain high and rates — for now, anyway — remain low.

Atlanta Fed targets flat GDP for the first quarter. In a report issued yesterday, the Federal Reserve Bank of Atlanta projected 0 percent GDP growth for the U.S. in the first quarter, in part because of harsher-than-normal winter weather in parts of the country. The bank’s GDPNow model was updated following the U.S. Census Bureau’s release of weaker-than-forecast construction spending data was released.

Google in EU crosshairs. Reports published today predict a multibillion dollar antitrust lawsuit is being brought by the European Union against search engine Google in the culmination of a politically charged, highly public investigation. Late last year, the European Parliament passed a nonbinding resolution targeted at Google to force a breakup of its search engine business from other divisions. Critics of the investigations have accused the EU of protectionist motivations.

GoDaddy IPO soars. After pricing at $20 per share, on the high side of the offering range, GoDaddy rose by 31 percent on its debut day as a listed company. The 18-year-old Internet domain registrar and web hosting company, which has never posted annual profit, now carries a market capitalization worth more than $6 billion.

ECB provides buffer for Greek banks. In a move that may partially assuage depositors concerned about implications of the ongoing battle between Athens and Brussels, the European Central Bank today raised the emergency funding available to Greek banks by €700 million ($757.9 million) each. Funding for Greek banks has been difficult once the ECB stopped accepting Greek treasury debt as collateral, forcing reliance on more expensive emergency facilities to maintain liquidity.

U.S. unemployment claims show unexpected decline. First-time claims for state unemployment benefits for the week ending March 28 dropped 20,000 to a seasonally adjusted 268,000, bettering economists'  consensus forecast of 285,000.The four-week moving average of claims also dropped this past week, from 14,750 to 285,500. The improving labor market is another sign that Federal Reserve rate normalization may be on the cards later this year.

Portfolio Perspective: Uneconomic Uncertainty is Just More of The SameAron Gampel, Scotiabank

The recent sluggish economic performance around the globe is a reflection of the pervasive drag of long-standing structural problems. Uncertainty over oil prices is a major source of volatility and economic underperformance in many oil-exporting nations. Similarly, reforms underway in some developing countries may take longer to yield fruit, given the overall recent strength of the U.S. dollar. With limited maneuvering room for fiscal initiatives, there is the potential for further central bank rate cuts, especially with inflation pressures still unwinding, corporate earnings momentum slowing, and stronger growth yet to materialize. Policymakers must be vigilant for a further weakening in nominal growth that would aggravate private and public sector debt burdens. Monetary officials in China and Canada, for example, have indicated that policy rates could be reduced another notch on top of recent cuts in the event that disinflationary trends persist if domestic economic conditions fail to rebound. The European Central Bank is ramping up its quantitative easing program.

In this environment, most currencies around the world are likely to trend lower vis-à-vis the U.S. dollar. The Fed has suggested to expect rate normalization this year, as improving U.S. economic conditions tighten capacity and lift inflation prospects. It has indicated that the rate trajectory will probably be slower and lower than in prior cycles. Even a modest tightening by the Fed will reinforce expectations of a stronger greenback.

Aron Gampel is a vice-president and deputy chief economist of Scotia Capital, part of Scotiabank, in Toronto.

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