Equities were on the back foot again last week with the S&P down -1.6% and the MSCI World down -1.5%. The US dollar also broadly declined with the DXY Index down 0.5%; but this didn’t stop sterling from weakening a further 1.1% versus the dollar as Theresa May’s Cabinet and support fell to pieces as she fought to push forward with the current negotiated deal with the EU. It seems the Cabinet agreed to the terms under duress and with the expectation it would get shot down in Parliament.
Following the October rout, US equities continued their bounce into a second week of >2% gains while US Treasuries also rose with 10-year yields falling 3 basis points to 3.18% and 30-year yields falling 7 basis points to 3.38%. European and Japanese equity markets were comparatively flat on the week while the Chinese CSI 300 and Hang Seng sold-off -3.7% and -3.3% respectively. The dollar strengthened towards the end of the week following the results of the US midterms with the DXY Index up 0.4%; also the Fed maintained rates as expected.
Last week US equities broadly retraced over half of the previous week’s losses with the S&P 500 closing up 2.4% at 2,723; US 10-year Treasury yields rose nearly 14 basis points to 3.21; but Emerging Markets were the most obvious winners with the MSCI EM Index up 6.1% on the week, breaking the run of five consecutive negative weeks’ of performance.
Last week began with results from elections in Brazil where far-right candidate Jair Bolsonaro was voted in as the next Brazilian President securing 55.1% of the vote.
It was another volatile market for equities with the VIX jumping to 27.5, after having remained steadily around 13 for all of September. US Treasuries did what they were supposed to, 10-year yields rallying 12 basis points to 3.076%. Even with 3.5% Q3 GDP beating forecasts, US equities led on the downside. The S&P 500 fell 109 points to 2658 on the week and the MSCI World Index absorbed similar losses of -3.9%. By Friday morning the -4% fall in the S&P 500 brought the Index into correction territory: when downside exceeded -10% from highs on the 21st September.
Although quite volatile again, the S&P 500 ended last week unchanged from the week before at 2767, US 10-year Treasury yields closed the week at 3.19% (+3bps) and Italian 10-year bonds were slightly stronger by week-end but only after yields touched fresh highs of 3.8% earlier on Friday. The FOMC minutes showed some small changes in terms of overall stance. From a more hawkish tone a wording change from “accommodative” to “restrictive” and speaking of the possibility of raising interest rates above the anticipated “normalization” rate pushed-up average estimates for where the upper bound might be for short-medium-term interest rates.
A shorter week in US markets with Columbus Day along with a light economic calendar didn’t stop a sharp sell off in equities: that began in the US but spread through global markets with little warning or a clear primary cause. The S&P 500 fell 5.4% with technology, industrials and commodities bearing the brunt of the sell-off. Consumer staples and other defensive stocks faring better points more to trade tension and macroeconomic fears rather than interest rate concerns. US 10-year Treasury yields retraced downwards 22bps on the week to 3.16%. Brent crude topped $85 a barrel earlier in the week but dipped back below $80 on Friday before being pushed-up again over the weekend as disputes resurfaced between Saudi Arabia and Turkey. Also on the last day of Golden Week in China, the PBoC cut the reserve requirement ratio by 100bp.
The Italian government and their proposed budget continued to be punished by the bond market pushing ten-year yields up through 3.50%, levels not seen since early 2014. Moreover Italian banks, with their €260bln in non-performing loans of the reported €2trln of loans held, own €102bln of outstanding loans and guarantees in the construction industry. Broadly, three of the largest builders are either insolvent or negotiating with creditors, with the construction sector already accounting for the highest default rates in the Italian economy. The problem in construction stems from years of tightening public spending that has ensured the once extremely lucrative government infrastructure contracts have dried up in the weakening economy. In fact, infrastructure spending has fallen 70% over the last ten years according to the University of Turin. Combine the construction industry financial problems with rising government bond yields of which the banks reportedly have holdings of around €375bln, and it is clear to see bank balance sheets are being severely pressured with very little available to help alleviate the strains.
Also last week the IMF published its Global Financial Stability Report which marked 10 years since the Global Financial Crisis. The report, titled “Are We Safer?”, highlighted how “short-term risks to the financial system have increased somewhat over the past six months” but also “new standards that have contributed to a more resilient financial system—less leveraged, more liquid, and better and more intensively supervised”. This tension between improvements in policy but much less-so in fundamentals support the reports view that “asset valuations remain stretched across several sectors and regions” and that “risks could rise sharply” across fragile economies through the likes of: escalating trade tensions, no-deal Brexit, renewed concerns over-indebted euro area fiscal policy and a faster-than-expected normalisation of monetary policy.
Looking ahead, on Monday we get data on US retail sales whilst the Italian government look to approve their latest budget, China CPI and UK employment data Tuesday, UK and EU CPI followed by Fed minutes on Wednesday, with China GDP and Japan CPI being published on Friday. Also it continues to be another busy week of earnings reports ahead as well as Brexit negotiations (or at least news about lack of negotiations).
Last week, in spite and because of broadly stronger macro data, central-bank-speak and the new US-Mexico-Canada Agreement (USMCA), both bonds and equities retreated in unison; developed markets also fell alongside emerging markets as risk aversion rose. S&P 500 Index was down a percent while US 10-year Treasury yields rose 5.6bps to 3.23% with the curve steepening: the 5/30-year term spread rose 8bps from 25bps to 33bps.
Last week began with markets digesting further growth downgrades from the OECD alongside a report from the Bank of International Settlements (BIS) warning about the growing risks of high-risk lending and leveraged loans. The week ended (also closing out the third quarter) with escalating US-China trade disputes contrasting news of the new US-Mexico-Canada Agreement, or USMCA, to supersede the eschewed NAFTA. US equities mostly maintained a tight (10 point) range over the week apart from a temporary dip following Thursday’s anticipated quarter-point hike of the Fed Funds Target Rate to 2% (lower bound), whilst US 10-year Treasury yields closed the week where they started at 3.06%.
US 10-year Treasury yields rose 6 basis points over the course of last week testing the 3% level again as it did back at the beginning of August; it followed a busy week from central banks outside the US broadly moving in a positive direction, and perhaps being seen to be on track for slowly closing the chasm between interest rate policies on opposite sides of the Atlantic. The S&P 500 Index gained 1.16% recovering the previous week’s losses and the US dollar weakened slightly from 95.37 to 94.93 according to the DXY Index.
The focus of the economic calendar last week was US employment data with a (seasonally adjusted) growth in nonfarm payrolls of 201k, beating forecasts of 190k, but with prior month’s data revised down from 157k to 147k. A concurrent uptick in wages of 2.9% year-on-year (above forecasts of 2.7% and previously lacklustre) gave support to the positive US employment picture; US Treasuries rose 8 basis points over the week to yield 2.94%. Robust PMIs reinforced this narrative with manufacturing PMI hitting a 14 year high of 61.3 and non-manufacturing PMI rising to 58.5. Contrasting this however are the ongoing US trade disputes with data showing a July trade deficit of over $50bn: as its trade deficit with China and the EU hit records of $36.8bn and $17.6bn respectively.
Last week emerging markets continued on edge as the Argentinian peso dropped 7% following President Mauricio Marci’s botched attempt to reassure markets whilst requesting accelerated disbursements from the IMF. Turkey added to the sense of ‘what next’ after a string of unconventional thinking and poor decisions from President Recep Tayyip Erdoğan and his retinue has helped pushed inflation to around 18%, four-times their official target; their central bank is expected to raise rates next week. Both the Argentinian peso and Turkish lira are down more than 40% versus the dollar so far this year with the peso close to losing half its value.
Last week maintained the trend of the previous fortnight in developed markets with US 10-year Treasury yields again marginally down a further 1.3bps from 2.874% to 2.861% and the dollar DXY Index holding around the 96-something range. The US Treasury curve was only marginally flatter after the US achieved a successful sale of nearly $100bn of short term paper. After falling most of 2018 gold may have found a floor after plummeting almost 4% in the first half of the week before recovering half of this to finish the week down -2.2% at 1184.
The US Treasury curve flattened last week despite the record $26bn 10-year issuance; yields fell 7.6bps from 2.950% to 2.874% and 30-year yields moved 5.8bps lower from 3.089% to 3.031%. The Turkish lira continued to set record lows against major currencies as the country wrestles with a crisis that is beginning to rattle other markets. The euro is also facing headwinds because of the crisis with growing concerns from the European Central Bank (ECB) about banks in France, Spain and Italy and their exposure to Turkey's troubles.
Last week saw a fair amount of central bank news and data releases, with most as expected and all having relatively little impact on the markets on the whole. US 10-year Treasuries started and ended the week yielding 2.95% with the dollar slightly stronger by half-a-percent – with the DXY Index rising from 94.67 to 95.15. Trump on the other hand managed to continue to stir-up markets threatening to shut down the government save for the backing of his immigration proposals, and to raise tariffs against China to 20-25% across the board. Last week will also be remembered as the first time a company was valued at $1 trillion: as Apple beat Amazon, Google and Microsoft to the milestone.
A roller coaster week saw further trade rhetoric grab market attention with Trump’s comments such as “Tariffs are the greatest”, and renminbi “has been dropping like a rock” not helping market stability. Fortunately, on Thursday, US-EU trade talks appeared to calm markets. US Q2’18 GDP came in at 4.1%, marginally below expectations; although still a strong reading, Friday saw the S&P fall, dragged by the US tech sector. Meanwhile, the dollar closed the week 0.20% higher, the yield on the 10-year UST moved 6bps higher to 2.96%, and Brent gained 1.67%.
Last week stocks remained broadly flat with light trading as US 10-year Treasury yields rose 4bps (from 2.84% to 2.88%) and the dollar ended the week overall slightly weaker undoing its strength earlier in the week. Also earlier this week Fed Chair Jay Powell left markets guessing with just a couple of words of ad-libbing during his testimony to Congress, stating, “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that (for now) the best way forward is to keep gradually raising the federal funds rate.”
Markets witnessed a rollercoaster week as trade war concerns ramped up; the yield on the 10-year UST was marginally unchanged, although the curve continued to flatten. The US announced a further USD 200bn worth of Chinese imports on which it wishes to impose 10% tariffs; subject to public consultation by the end of August. Calling the new list of tariffs “totally unacceptable” bullying, China vowed once again to retaliate; with the US touting a total of USD 500bn worth of Chinese goods to be subject to tariffs, China may struggle to fight back with the same magnitude, as it only imports ~USD150bn from the United States.
Another mixed week across asset classes saw the yield on the 10-year UST rally 4bps, to 2.82% while the dollar softened 0.54%. Meanwhile, Brent, fell 2.68% after Trump barked that OPEC must “reduce pricing now!”. The renminbi also came back into the spotlight following the recent trade sentiment driven downturn. Although the offshore renminbi was broadly lower against the dollar, it had recovered into the end of the week; we believe the weakness was overdone and expect stability to return and for the currency to strengthen over the long term. The PBoC stated that it is not willing to intervene in the fx market, adding that it will maintain liquidity at reasonable and sufficient levels and that deleveraging remains on track.
A mixed week across asset classes saw the yield on the 10-year close 4bps lower at 2.86%, and the UST curve flatten; the 2s30s spread narrowed further, partly due to a better-than-expected 30-year auction. Meanwhile, global stock markets suffered a sell-off, the dollar was relatively flat, while Brent bounced over 5% to almost $80pb. In terms of key data, the third reading for Q1’18 US GDP disappointed at 2% (from 2.2%) while the US PCE report surprised to the upside at 2%yoy in May. China’s official PMI readings over the weekend remained strong, with the services reading beating expectations.
Tit-for-tat trade rhetoric dominated market focus in what was a fairly light data week; we will continue to monitor developments and negotiations in the coming weeks with the US tariff deadline on China’s goods and services due on July, 6. US internet retailers came under pressure last week after the US Supreme Court ruled that states and local governments can start collecting currently uncharged taxes from sales made online. Closer to home, the BoE stayed pat on rates, however, appeared more hawkish with MPC member Haldane’s surprising switch from hold to hike; the probability for a hike in August spiked above 50% (to 69%) following the meeting. The central bank did note that the soft Q1’18 GDP reading was “temporary”, adding that employment remains strong.