Earnings take limelight, Sterling says “What Brexit?”

Strong earnings have finally stepped out into the limelight, allowing geopolitical and trade risks to fade into the background. After a wobble on Monday, sentiment seems to be on the mend. US and UK authorities warning on a Russian cyber-attack came across as hyped up and fell on deaf ears in markets.

The shares of European carmakers were strong gainers. China announcing plans to relax decades-old rules on foreign ownership of its manufacturers is boon to the likes of Volkswagen, BMW and Peugeot. The full impact will not be felt for up to five years but European automakers can already plan to step away from the costly and inefficient partnerships with domestic Chinese carmakers, which have held back growth.

Associated British Foods (ABF) led a rally in retail company shares on the FTSE 100 after reporting half-year results. Next, Tesco and M&S were amidst the top risers. The slowdown in sales and profit growth at Primark since full-year results in October is relative. The rest of the high street is in meltdown and the weather has been patchy at best. Any growth for a retailer is impressive. Adding to the enthusiasm for mostly-beaten down retail sector, JD Sports reported a 24% jump in full-year profits. JD Sports’ risky expansion overseas against well-established domestic competition is paying off.

On Wall Street, a surge in Netflix shares after reporting its Q1 results spurred hopes of a tech sector recovery. Shares of Amazon and Alphabet both gained over 2% as markets priced in similarly impressive results next week. Shares of Goldman Sachs fell despite turmoil in markets during the first quarter generating bumper trading revenues. An emerging trend for the reaction to strong US bank earnings has been the difficulty in surpassing lofty expectations.

The British pound has reached its highest since Brexit. The caveat is that it is in dollar-terms. On a trade-weighted basis, Sterling is heading in the right direction but there is still some way to go to recover the drop since Brexit. Data today showed UK wages rising faster than inflation in February. The MPC meeting on May 10 has been earmarked for a while as the most likely time for a rate raise. With the cost of living squeeze at an end, it will be quite a shocker if the Bank of England do not vote to nudge up interest rates by 25 basis points at the next opportunity.

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