Risk aversion returned last week as U.S.-China trade tensions continued. China retaliated to a ratcheting up of rhetoric from the U.S. with a probe into U.S. logistics group FedEx and plans to announce a blacklist of foreign companies that harm the interests of Chinese groups. China (who controls over 80% of global rare earth mineral production) also threatened to restrict export of rare earth minerals, important in production of sophisticated technology equipment, to the US.
- Global equity markets fell over the week as global trade war concerns continue to dominate headlines. In addition to continuing U.S.-China trade tensions, the U.S. President also announced a series of escalating tariffs on Mexican imports due to a perceived lack of action by the Mexican government on illegal immigration.
- The S&P 500 index fell by 2.6%, underperforming the MSCI World index, which fell by 2.3% over the week. On a year-to-date basis, the S&P 500 index has outperformed the MSCI World index (10.7% vs 10.1%).
- U.S. Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 index fell by 2.6% while the Russell 2000 index fell by 3.2%. On a year-to-date basis, the S&P 500 Index has outperformed the Russell 2000 Index (10.7% vs 9.3%). Growth stocks fell by 2.0% and Value stocks fell by 3.2% over the week as measured by the MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (14.5% vs 7.6%).
- The 10-year U.S. treasury bond yield fell by 7bps to 2.22% and the 30-year U.S. treasury bond yield fell by 8bps to 2.65%. The 20-year TIPS yield fell by 8bps to 0.66% and the 20-year breakeven inflation fell by 2bps to 1.80%.
- The spreads on the Bloomberg Barclays Capital Long Credit Index rose by 7bps to 179bps and the Bank of America Merrill Lynch U.S. Corporate Index rose by 8bps to 135bps. The U.S. high yield bond spread over U.S. treasury yields rose by 43bps to 459bps and the spread of USD denominated EM debt over U.S. treasury yields rose by 13bps to 382bps over the week.
- The S&P GSCI index fell by 4.5% in USD terms over the week. The S&P GSCI Energy index fell by 7.7% as the price of WTI Crude oil fell by 8.7% to US$54/BBL. Industrial metal prices fell by 1.3% as copper prices fell by 2.3% to US$5,781/MT. Agricultural prices went up by 4.6% and gold prices rose by 1.0% to US$1,296/Oz.
- The U.S. dollar appreciated against most major currencies over the week (except JPY). The U.S. dollar appreciated by 0.7% against sterling, ending the week at $1.26/£. The U.S. dollar appreciated by 0.5% against the euro, finishing the week at $1.11/€. The U.S. dollar depreciated by 0.7% against the Japanese yen, ending the week at ¥108.58/$. The U.S. dollar appreciated by 0.4% against the Canadian dollar, ending the week at C$1.35/$.
- Although the second reading of U.S. economic growth was revised marginally lower to 3.1% (quarter-on-quarter annualized) for Q1 2019 from the initial reading of 3.2%, it came in above consensus estimates of a slightly stronger revision to 3.0%. Underlying personal consumption growth rose by 1.3% over the same period, which was above both the previous and expected reading of 1.2%. Against expectations of inflation remaining at 1.3%, the core Personal Consumption expenditure (PCE) price index (the Fed's preferred measure of inflation) slowed to 1.0%. Elsewhere, consumer confidence improved strongly over May with the Conference Board's Consumer Confidence index rising to 134.1, above expectations of 130.0 and the previous reading of 129.2.
- Euro area economic confidence unexpectedly improved in May as it rose to 105.1, the first rise in eleven months, from 103.9 in April against expectation for a modest improvement to 104. However, the Business Climate Indicator continued its decline, falling to 0.3 in May from 0.42 and below expectations of 0.4. German unemployment rose by 60k in May 2019, the first rise since June 2017 and largest rise in a decade. The German inflation rate slowed down with the EU-harmonized Consumer Price Index increasing by 1.3% year-on-year in May, below the 2.1% increase seen in the previous month and marginally below the consensus estimate of 1.4% increase. Elsewhere, German retail sales strongly rebounded by 4.0% in the year to April 2019, beating expectation of it increasing by 1.4%.
- Based on preliminary data, industrial production rebounded by 0.6% in Japan over April. The better than expected increase of 0.2% was attributed to firms increasing production ahead of the country’s annual Golden Week holiday (April 27 to May 6). Retail sales missed expectations of a 0.6% increase and were flat in April, while growth slowed down from prior month’s 0.2% increase. As expected, Japan’s jobless rate fell to 2.4% in April whilst the job-to-applicant ratio was unchanged at 1.63.
- Amid heightened trade war tension, the Chinese manufacturing sector returned to contractionary territory based on PMI data. The official manufacturing PMI index slipped to 49.4 in May from 50.1 in the previous month, worse than the expected slowdown of 49.9. The official non-manufacturing index, however, remained at 54.3 over the same period. The composite PMI edged down to 53.3 in May from 53.4. The Caixin manufacturing PMI, which focuses on small and mid-sized Chinese business, stood at 50.2 – unchanged from the prior reading and slightly above expectations of the index decreasing to 50.0.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.
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