As U.S. nonfarm payrolls exceeded expectations -- April's number came in at 211,000 vs. forecasts of around 185,000 in a FactSet poll -- the case for more interest rate hikes by the Fed seems clear. This is leading the euro slightly lower, but investors could use the single European currency's weakness to their advantage. A weaker euro means more firepower for those set to expand into Europe.
The strong jobs report is a timely reminder that investors ought to start diversifying from the U.S. market. Corporate insiders are selling U.S. shares, just as more and more pundits warn that the rally is getting very long in the tooth. Brad Lamensdorf's Market Timing Report showed that corporate insider selling has reached a seven-year high.
The high valuation of U.S. equities is one of the reasons for insiders selling. Currently, the price-to-sales ratio is at its second-highest level ever. The highest level was reached during the tech bubble at the turn of the century.
Besides, according to the Lamensforf Market Timing Report, the real earnings yield for the S&P 500 has fallen to its lowest level in seven years, as a jump in inflation coincided with a recent rise in interest rates. "This suggests that the forward rate of return will be substantially diminished," he wrote.
More evidence is emerging that investors would be better off buying Europe right now (perhaps not the U.K., though). Asian markets declined overnight, led by Hong Kong. Chinese stocks are on track for their longest losing streak of the year, with regulators trying to curb speculation with borrowed money.
The crackdown on certain so-called wealth management products -- one example would be life insurance with investment components that are, in fact, risky bets on various companies -- has led to a decrease of liquidity available and rising money market interest rates.
The Chinese regulators will have to walk a very fine line between engineering a deleveraging for these risky products and crashing the stock market, as there are signs the economy is slowing down, so companies' earnings will likely be subdued.
By contrast, Europe looks like a ray of sunshine (or at least, it will do, if as predicted Monday shows a victory for Emmanuel Macron over Marine Le Pen in the French presidential runoff).
So far, the European earnings season has shaped up to be dominated by positive surprises. With almost 32% of companies having reported, 53% posted positive surprises, 15% reported in-line results and 32% surprised negatively, according to FactSet data.
Not bad for a continent whose economy has been sluggish for years (but managed to surpass both the U.S. and the U.K. in first-quarter growth this year).
Looking at sectors, the biggest positive surprises came from the consumer durables sector, with 81.25% of the companies in this sector having reported beating expectations, followed by the financial sector with almost 63% and the health technology sector with 60%.
Consumer non-durables, consumer services, industrial services, producer manufacturing, process industries and technology services all scored more than 50% in positive surprises. This indicates that the recovery still has a way to go, as the European business cycle seems to be quite young.
With political risks seemingly contained in Europe, the region looks like a prime destination for investors right now.