After a terrible start to the week, the S&P 500 closed down just -0.76%. US “trade tensions” with the EU and “trade war” with China continued to escalate at the beginning of last week. But following a big dip on Monday, President Trump signalled a postponement of tariffs on European autos helping allay fears, at least in relation to US and European markets. The brinkmanship with China, however, continues with the blacklisting of Huawei in a tat-for-tit against China’s retaliatory 25% tariffs on a further $60 billion of imports after trade talks fell through the week before last.
Last week was all about the rising trade tensions between the US and China which resulted in ten year UST notes 5bp lower in yield and the S&P 500 index nearly 3% lower on the week.
The threat of tariffs reaches beyond US-China to the US’ other trading partners such as Europe and Japan. Trump has been threatening to impose tariffs on auto imports and a ‘section 232’ report from the US Department of Commerce on February 17 opened the door for him to impose 25% tariffs on auto imports on national security grounds: the President has 90 days to make a decision on this, although with opposition from Congress and with trade talks ongoing the decision could get delayed. Europe agreed a mandate in April to begin negotiations with the US on industrial goods although has threatened to suspend negotiations if auto or further tariffs are imposed.
With the Easter holidays the week got off to a slow start. There was talk from the Federal Reserve officials about the conditions under which they would cut interest rates, including a scenario where inflation drifts lower even if the economic growth doesn't falter. Such a scenario isn't seen as particularly likely, and they said a rate cut isn't imminent or under consideration for their meeting April 30-May 1. However, the threshold for such action has been a topic of conversation in recent interviews and public remarks.
In the markets, the S&P 500 touched fresh highs, closing the week just shy of 2,940, after gaining 1.2% on the week. US Treasuries made parallel gains with 10-year yields falling 6 basis points and back below 2.5%. Meanwhile, the US dollar made further gains with the DXY Index closing out the week by pushing above 98 for the first time in nearly 2 years.
Last week was a continuation of markets cautiously venturing further into a risk-on environment with the S&P 500 and MSCI World both up around a half percent and US 10-year Treasury yields moving 7 basis points higher, following the 9 basis point move the previous week. One driving factor was reassurances out of the ECB meeting which, along with leaving rates unchanged, signaled favourable conditions for the forthcoming round of TLTROs in September. Another factor was, of course, the further extension of the Brexit deadline: which prevented a hard Brexit on Friday just gone but will prolong uncertainty without giving much time for a public vote on either the deal or a new Government. With this still short lifeline given, Parliament have now changed gear to reach a compromise: agreeing to recess for a couple of weeks over Easter. Some discussions remain ongoing but the spluttering and stalling and persistent market concerns have been evident in the FX markets: where sterling has remained somewhat range-bound despite the real and imminent no-deal scenario being averted. Perhaps some are balancing the deal positives with potential political negatives with the latest poll data adding to concerns of a Corbyn government within the year.
Although economic data was mixed last week, equities pushed higher as markets seemed to focus more on the positive services data versus the weaker narrative seen in some manufacturing data: including undershooting PMIs and most notably abysmal factory orders out of Germany (although China’s manufacturing PMI was stronger on the back of stimulus measures). Both the S&P 500 and MSCI World indices were up 2% last week; meanwhile cyclicals, financials and technology outperformed defensives and US 10-year Treasuries sold off 9 basis points to yields of 2.5%. Once again, the US-China trade deal was said to be getting “closer and closer” according to the Director of the US National Economic Council, Larry Kudlow, and it does finally feel like this turtle facing headwinds is nearing a finishing line: at least with stage one of the negotiations expected to be signed-off by June.
US Treasuries closed out a fourth week of gains, with yields falling a further 4 basis points on the 10-year to yields of 2.4%; this brought the rally in Treasuries for the month of March to over 30 basis points. Equities also performed over the last week of March with the S&P 500 up 1.2% closing up 1.8% on the month to cement in steady monthly gains for the first quarter of 2019. It seems equities are still focusing on the stimulus effects of the recent more accommodative stance of the Fed; whereas the bond market is putting more importance on the move as another warning sign of a looming cyclical slowdown, and even near-term prospect of a recession following the US yield curve (briefly) inverting between the 3-month and 10-year points.
USD 10-year Treasuries rallied 15 basis points to 2.44% last week following rekindled growth concerns and the Fed’s further back-pedalling on last December’s rate hike. On Friday, a sharp -1.9% fall in the S&P 500 more than unwound earlier gains to close the week down -0.8%. Adding to the unsettledness was the media-attention-grabbing inversion of the US Treasury yield curve between the 3-month and 10-year marks, which has historically had a strong correlation with a coming recession (leading from a few months to a few years).
Both stocks and bonds were on the front foot last week after US core inflation data came in up just 0.1% month-on-month, further relieving any lingering fears of immediate runaway inflation. The year-on-year core figure came in at 2.1% (0.1% below expectations and the previous month’s reading) while real average hourly earnings were up 1.9% yoy. The S&P 500 ended the week up 2.9% while US 10-year Treasury yields rallied 4 basis points to 2.59% - pushing below 2.6% for the second time this year (after flirting with such low yields for a day early in January) but this time falling yields come even as USD 24bln in supply was swallowed up by a bond hungry market.
Risk-off assets including higher-grade bonds were favoured last week as US 10-year Treasury yields fell 13 basis points to 2.63% while US equities lost momentum: with the S&P 500 falling -2.2% after almost ten straight weeks of gains this year (with one -0.2% week in January). While the US Fed was busy receiving another string of criticism from President Trump the ECB was busy issuing some dovish guidance and detailing new TLTROs for September providing a boost to Italian debt markets. Broader negative sentiment could not be avoided with numerous downward revisions to global growth forecasts in addition to weak data from US manufacturing ISM and the Fed’s Beige Book release detailing the economic drag from the government shutdown.
Last week global markets began with equities on the front foot with further announcements that a detailed trade deal between the US and China is near completion; the Chinese CSI 300 was up +6% on Monday alone and rallied further to close out the week. Other global equities were also positive performers with the S&P 500 up +0.4% making the ninth week out of the ten this year to yield a positive return. In addition to the positive statements over a potential trade deal, Fed chair Powell reiterated the FOMC’s willingness to be patient before any further rate hikes, and data last week (including US GDP and China PMI) exceeded their (meagre) expectations. US 10-year Treasury yields rose 10 basis points to 2.75% - remaining within the 2.60-2.75% range they have traded on for most of 2019 thus far.
Another week of mixed data, another positive week for equities with the S&P 500 up 0.62% whilst US 10-year Treasury yields held around 2.65%. The week began with a cloud over EU growth prospects with Francois Villeroy de Galhau, an ECB Council member warning that the slowdown in the EU economy over the recent months has been ‘significant’, to the extent that if it becomes clear it’s not a temporary blip, the ECB will have to change its forward guidance.
Last week, the Dow Jones Industrial Average was again up a full +3.1% on indications Trump may allow some concessions and extensions on both the international trade talks and border wall funding disputes; the former would otherwise revert to higher tariffs on the 1st March. The latter avoided another federal government shutdown over the weekend: but only through the Republican Senate agreeing to fund around a quarter of the border wall expense and Trump declaring a national emergency to divert funding for the rest.
Last week we had a quiet start with a lot of Asia out due to the Chinese New Year. We started the week with warnings from Ignazio Visco, the Bank of Italy’s Governor, warning of the downside risks to the central bank’s forecast for economic growth after the nation slipped into a recession in the last quarter of 2018. The recession, Italy’s third in a decade comes as the bank’s latest growth projection of 0.6% GDP growth for 2019 and 1% for 2020 start to look optimistic, in spite of being in-line with national and international forecasters. Visco acknowledged ‘The prospects for the Italian economy are less favourable today than they were a year ago’ adding there are ‘significant risks on the downside’.
Despite last week being the busiest for corporate earnings – with 41% of S&P companies reporting fourth quarter results – it was again the Fed that moved global stock and bond markets the most. The S&P 500 resumed its rally, up a further +1.6%, whilst the Fed’s new dovish tone was also a boost to emerging markets with the MSCI EM Index up +1.7%. US Treasuries also rallied on the Fed announcement with 10-year yields falling 7 basis points. Passing month end on Thursday, the S&P was up +7.9% YTD making it the best performing January in three decades; this was despite flags over growth in China not only from official statistics like weak industrial profits but also from a number of corporate earnings misses (like Caterpillar’s latest) blaming “lower demand” from China as the main reason for the shortfall.
Last week, IMF global growth forecasts for 2019 were revised lower again with notable slowdowns in Germany, Italy and China. The underestimated challenges of reaching specifics on a trade agreement between US and China were highlighted by Wilbur Ross, US Trade Secretary, perhaps trying to dampen expectations ahead of the forthcoming US visit of Vice Premier Liu He. Resolving contrasting intellectual property attitudes, for example, continues to prove infinitely more difficult: in contrast to recent progress on simpler issues that have often come with overblown press statements.
Last week the US government shutdown and the UK’s Brexit fiasco continued to get messier but US stocks extended into their fourth week of gains with the S&P 500 closing the week at 2,671 up +2.9% and the Dow up +3% closing at 24,706; meanwhile, US 10-year Treasury yields rose 8 basis points to 2.785%. Much of this return to risk and into equities continued to be driven by signs of modest progress and media statements out of the US-China trade talks with more to come as Vice Premier Liu He flies to the US at the end of the month.
Last week global equities continued their 2019 gains making the three week rally one of the strongest starts to the year in over 30 years – mostly due of course to one of the worst ends to the year in the three weeks ending 2018; the S&P 500 was up a further +2.54% on the week pushing the bounce since Christmas Eve above +10%. Also, on the back of wide-reaching optimism on the Sino-US trade negotiations and the Fed’s increasingly cautious tone and promise to be patient with further hikes, the Chinese yuan had its strongest week since 2005 with both CNH and CNY appreciating over +1.5%.
This week China built upon recent efforts to curb the escalating protectionism by reducing customs duties (on cars) and increasing imports of commodities; Trump went so far as to temper his nationalist invective for a few days and refrain from further threats on China. Nevertheless, US equities continued downwards with the S&P 500 down a further -1.26% and closing the week below 2,600 for the first time since March. This pushed returns for the year into negative territory with the price index down -2.76% for 2018. Now down 340 points since a peak in September the S&P 500 would still need to fall a further 250 points to around 2,350 to enter technical bearish territory (like the German DAX: which breached the -20% level earlier this month thanks in part to Deutsche Bank). The poor recent performance in Europe was further accompanied by a weaker growth outlook for 2019: with the ECB this week cutting forecasts for the Eurozone from 1.7% to just 1.5%.
Markets opened the week with news that China and the US had agreed to a trade war ceasefire over the weekend at the G20 meeting. But the boost in US equities lasted not even as long as the conference itself and fell back around recent lows; the S&P 500 has now tried three times, since the October equity cliff edge, to push meaningfully above the 2,800 and for a third time fell approximately -6% to around 2,630.
US Treasury yields fell 5 basis points last week, which was just enough to bring them below 3% to close out November. The November FOMC Minutes emphasised that ‘monetary policy was not on a ‘preset course’, it should be ‘guided by incoming data’ and that ‘a gradual approach’ remained appropriate. Another 25 basis point hike in the Fed Funds target range in December still looks extremely likely as ‘almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon’ assuming no drastic change in the job and inflation data.