Week in Markets (Week Ending June 9, 2019)

June 10, 2019

Equities

  • Geopolitical uncertainties continued to dominate news flow. The Chinese government blamed the United States for the breakdown in trade negotiations in a government policy paper issued last week. China also announced proposals to restrict the export of sensitive technologies and threatened to retaliate against firms which, in compliance with a U.S. Commerce Department ban, refused to work with Huawei. Elsewhere, U.S. President Donald Trump announced an indefinite suspension of the proposed series of escalating tariffs on Mexican imports, as Mexico reached a deal with the U.S. to take stronger measures to stem the flow of unauthorized migrants into the U.S.
  • Global equity markets rose over the week on increased expectations of a rate cut by the Federal Reserve at their July meeting. The European Central Bank (ECB) also struck a more dovish tone, with ECB President Mario Draghi providing strong indications that they were prepared to cut rates and embark on a fresh round of bond purchases if necessary.
  • The S&P 500 index rose by 4.5% over the week, outperforming the MSCI World index, which rose by 4.0%. On a year-to-date basis, the S&P 500 index outperformed the MSCI World index (15.7% vs 14.5%). 
  • U.S. Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 index rose by 4.5% while the Russell 2000 index rose by 3.4%. On a year-to-date basis, the S&P 500 index has outperformed the Russell 2000 index (15.7% vs 12.9%). Growth stocks rose by 4.4% and the Value stocks rose by 4.5% over the week as measured by the MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks outperformed Value stocks (19.5% vs 12.4%). 

Bonds 

  • The 10-year U.S. treasury yield fell by 6bps to 2.08% and 30-year U.S. treasury yield fell by 1bps to 2.57% over the week. The 20-year TIPS yield fell by 2bps to 0.56% and 20-year breakeven inflation fell by 1bps to 1.80% over the week.
  • The spreads on the Bloomberg Barclays Capital Long Credit Index fell by 2bps to 177bps and the spreads on the Bank of America Merrill Lynch U.S. Corporate Index fell by 1bp to 134bps. The U.S. high yield bond spread over U.S. treasury yields fell by 22bps to 437bps and the spread of USD denominated EM debt over U.S. treasury yields fell by 14bps to 368bps over the week.

Commodities   

  • The S&P GSCI index fell by 0.1% in USD terms over the week. The S&P GSCI Energy index rose by 0.3% as the price of WTI Crude oil rose by 0.9% to US$54/BBL, in a week in which crude oil prices touched a four-month low of US$51.68/BBL. Industrial metal prices fell by 1.3% as copper prices fell by 0.2% to US$5,770/MT. Agricultural prices fell by 1.6% and gold prices rose by 3.5% to US$1,341/Oz.   

Currencies 

  • The U.S. dollar depreciated against all major currencies over the week. The U.S. dollar depreciated by 1.2% against sterling, ending the week at $1.28/£. The U.S. dollar depreciated by 1.7% against the euro, finishing the week at $1.13/€. The U.S. dollar depreciated by 0.5% against the Japanese yen, ending the week at ¥108.03/$. The U.S. dollar depreciated by 1.8% against the Canadian dollar, ending the week at C$1.33/$.   

Economic Releases

  • Last week's jobs report underscored the slowing economic momentum in the US, as only 75k new jobs were added over May, significantly lower than the previous revised reading of 224k and analysts forecasts of 175k. Alongside weak hiring data, year-on-year growth in average hourly earnings was marginally down by 0.1% to 3.1%, undershooting expectation of an unchanged reading. The unemployment rate remained at a near 40-year low of 3.6%. A measure of national factory activity, the Institute of Supply Management's (ISM) manufacturing index, fell from 52.8 to 52.1 in May, the weakest level since October 2016. However, the sub-index measuring New Orders rose by 1.0 point to 52.7 and the Employment sub-index rose by 1.3 points to 53.7. On a more positive note, the Institute of Supply Management's (ISM) Non-Manufacturing index, a measure of activity in the services sector, rose to 56.9 from 55.5 and outperformed expectations of a marginal decrease to 55.4.
  • In the Euro Area, inflation eased as the headline consumer price inflation decelerated by 0.5% to 1.2% in the year to May, against consensus estimates of it slowing to 1.3%. Core inflation decreased by 0.5% to 0.8%. Retail sales contracted by 0.4% in April following March’s flat reading, taking year-on-year growth to 1.5% from the revised 2.0% in March. In Germany, industrial production contracted 1.9% in April from 0.5% growth in March. The German trade surplus fell from €22.6bn to €17.9bn, as exports fell by 3.7% in April.
  • Japanese economic growth was upwardly revised by 0.1% to 0.6% in Q1 2019, equivalent to an annualized economic growth rate of 2.2%, in line with analysts’ forecasts. Business spending expanded by 0.3% over the quarter, whilst private consumption contracted by 0.1%. The current account surplus narrowed from ¥2847.9bn to ¥1707.4bn in April, but this was above forecasts of a ¥1514.5bn surplus. Elsewhere, wages contracted for the fourth consecutive month, albeit at a slower pace than previously. Labor cash earnings contracted by 0.1% on a year-on-year basis in April following a 1.3% contraction in the previous month. Once adjusted for inflation, wages fell by 1.1% in real terms, compared to the 1.9% decline recorded in the previous month. The Nikkei Services PMI edged lower by 0.1 point to 51.7 in May and the overall composite PMI declined by 0.1 point to 50.7.
  • Despite the introduction of new U.S. tariffs in May, exports unexpectedly rebounded by 1.1% in the year to May, beating analyst forecasts of a 3.9% decrease. Conversely, imports fell by 8.5%, the largest fall since July 2016 and worse than an estimated decline of 3.5%. This reverses the 4.0% increase recorded in the previous month. Consequently, the trade surplus widened sharply from US$13.84bn to US$41.65bn, well above consensus estimates of a US$22.30bn surplus. Elsewhere, the Caixin Services PMI fell from 54.5 to 52.7 in May.

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

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