Week in Markets (Week Ending August 4, 2019)

August 5, 2019

Key News and Events

  • U.S. President Donald Trump threatened to impose a 10% tariff on the remaining $300bn worth of previously untaxed Chinese imports from the start of September. This would mean that essentially all Chinese exports to the U.S. will be subjected to tariffs. President Trump suggested that China has failed to implement promises made at the G20 summit at the end of June, including pledges to purchase more U.S. farm products and to restrict the flow of fentanyl to the U.S..
  • Amidst a slowing global economy and increasing geopolitical uncertainties, the U.S. Federal Reserve (Fed) cut the target range for the federal funds rate by 25bps to 2.00-2.25%. Fed officials called the move a “mid-cycle adjustment”, disappointing expectations for a start of a new monetary easing cycle. Elsewhere, the Bank of England (BoE) kept its interest rates unchanged. The BoE slashed its growth forecast for the UK and warned of a one in three chance of a recession by early 2020.
  • In the UK, the government earmarked an additional £2 billion for a potential no-deal Brexit scenario. The fund will be used to mitigate potential disruptions, by upgrading transport infrastructure near ports and hiring additional border officers.
  • Political tension escalated in the Asia Pacific region as the Japanese government decided to remove South Korea from its export county ‘white list’, which South Korea retaliated by removing Japan from its own list.

Week in Markets

Equities

  • Global equity markets fell over the week.
  • The S&P 500 index fell by 3.1% over the week, underperforming the MSCI World index, which fell by 2.9% as global trade tension re-escalated. On a year-to-date basis, the S&P 500 index outperformed the MSCI World index (18.3% vs 16.0%).
  • U.S. Large Cap stocks underperformed Small Cap stocks over the week, as the S&P 500 index fell by 3.1% while the Russell 2000 index fell by 2.8%. On a year-to-date basis, the S&P 500 index outperformed the Russell 2000 index (18.3% vs 14.6%).
  • Growth stocks underperformed Value stocks over the week as measured by the MSCI USA Growth and Value index. Growth Stocks fell by 3.5% while Value Stocks fell by 2.8% over the week. On a year-to-date basis, Growth Stocks outperformed Value Stocks (23.0% vs 14.3%).

Bonds

  • The 10-year U.S. treasury yield fell by 22bps to 1.86% and 30-year U.S. treasury yield fell by 21bps to 2.39% over the week in which the US Federal Reserve (Fed) cut the target range for the federal funds rate by 25bps to 2.00-2.25%.
  • The 20-year TIPS yield fell by 10bps to 0.43% and 20-year breakeven inflation fell by 12bps to 1.73% over the week.
  • The spreads on the Bank of America Merrill Lynch U.S. Corporate Index rose by 5bps to 119bps and the spreads on the Bloomberg Barclays Long Credit Index rose by 6bps to 160bps over the week.
  • The U.S. High Yield bond spread over U.S. treasury yields rose by 30bps to 419bps and the spread of USD denominated EM debt over U.S. treasury yields rose by 11bps to 345bps over the week.

Commodities

  • The S&P GSCI index fell by 2.1% in USD terms over the week.
  • The S&P GSCI Energy index fell by 1.5% as the price of WTI crude oil fell by 1.0% to US$56/BBL.
  • Industrial Metal prices fell by 2.8% as copper prices fell by 3.0% to US$5,769/MT.
  • Agricultural prices fell by 2.9% and gold prices rose by 1.5% to US$1,442/Oz.

Currencies

  • The U.S. dollar appreciated against most major currencies (except the Japanese yen) over the week.
  • Sterling depreciated by 2.2% against the U.S. dollar over the week, ending the week at $1.21/£.
  • The euro depreciated by 0.2% against the U.S. dollar over the week, ending the week at $1.11/€.
  • The Japanese yen appreciated by 2.0% against the U.S. dollar over the week, ending the week at ¥106.57/$.
  • The Canadian dollar depreciated by 0.4% against the U.S. dollar over the week, ending the week at C$1.32/$.

Highlighted Last Week Releases

Region

Description

Comment

U.S.

FOMC Rate Decision (Upper Bound)

The U.S. Federal Reserve (Fed) cut the target range for the federal funds rate by 25bps to 2.00-2.25%, cutting rates for the first time in a decade. However, the Fed was more hawkish than expected, with Fed Chair Jerome Powell indicating that it would not be the beginning of a long series of rate cuts, but rather a mid-cycle adjustment.

 

U.S.

Change in Nonfarm Payrolls

The U.S. economy added 164,000 jobs in the month of July, with unemployment rates at a near record low of 3.7%. Whilst this was slower than the job growth recorded in the previous month, it suggests that labour market conditions have remained tight.

 

UK

Bank of England Bank Rate

The Bank of England kept its benchmark interest rates on hold at 0.75%. The central bank reported stalling business investment amidst ongoing Brexit uncertainty and slowing global growth, and forecasted a 33% chance of a recession by early 2020 due to the impact from heightened uncertainty. The Bank also warned of a substantial instantaneous shock to the economy if Britain were to exit the EU without a deal.

Eurozone

GDP SA QoQ

The Eurozone economy grew by 0.2% in Q2 2019, slowing from the 0.4% growth recorded previously but in line with market expectations. The sluggish growth reading comes as the region's manufacturing sector continued to struggle amidst slowing global growth and escalating trade tensions, and reinforced expectations that the European Central Bank will cut rates at their next meeting in September.

Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Factset. Click here for index descriptions.

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