Week in Markets (Week Ending March 24, 2019)

March 25, 2019

Equities 

  • Global equity markets fell over the week as fears over slowing global growth returned following weak economic data releases.
  • The U.S. Federal Reserve (Fed), as expected, kept its benchmark interest rates unchanged at 2.25-2.50% in its latest monetary policy meeting. However, the Fed turned more dovish with 11 out of 17 Fed members indicating that they expect no rate hikes over 2019. The Fed also announced it would slow the monthly reduction of its treasury holdings from $30bn to $15bn starting in May, with plans to end its balance sheet reduction in September. The difference between three-month and ten-year U.S. treasury yields (a key measure watched by the Fed and seen as an indicator of a possible coming recession) turned negative for the first time since August 2007.
  • The S&P 500 index fell by 0.7% over the week, marginally underperforming the MSCI World index, which fell by 0.6%. On a year-to-date basis, the S&P 500 index has outperformed the MSCI World index (12.3% vs 11.8%). 
  • U.S. Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 index fell by 0.7% while the Russell 2000 index fell by 3.0%. On a year-to-date basis, the S&P 500 Index has marginally outperformed the Russell 2000 Index (12.3% vs. 12.0%). Growth stocks and Value stocks fell by 0.2% and 1.4% respectively 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 (14.9% vs 10.2%). 

Bonds  

  • The 10-year U.S. treasury yield fell by 14bps to 2.45% and the 30-year U.S. treasury yield fell by 13bps to 2.89% in a week in which the Fed indicated no further interest rate hikes are expected over the rest of the year. The 20-year TIPS yield fell by 12bps to 0.73% and the 20-year breakeven inflation rate fell by 2bps to 1.96%. 
  • The spreads on the Bloomberg Barclays Capital Long Credit Index and the Bank of America Merrill Lynch U.S. Corporate Index both fell by 1bp each to 173bps and 125bps respectively. The U.S. high yield bond spread over U.S. treasury yields rose by 8bps to 403bps. The spread of USD denominated EM debt over U.S. treasury yields rose by 6bps to 357bps over the week.

Commodities    

  • The S&P GSCI index rose by 0.4% in USD terms over the week. The S&P GSCI Energy index remained unchanged even though the price of WTI Crude oil rose by 0.9% to US$59/BBL. Industrial metal prices fell by 0.6% as copper prices fell by 0.5% to US$6,375/MT. Agricultural prices rose by 0.5% and gold prices rose by 0.6% to US$1,311/Oz.    

Currencies 

  • The US dollar appreciated against most major currencies (except JPY) over the week. The US dollar appreciated by 0.4% against sterling, ending the week at $1.32/£. The US dollar appreciated by 0.4% against the euro, finishing the week at $1.13/€. The US dollar depreciated by 1.6% against the Japanese yen, ending the week at ¥109.78/$. The US dollar appreciated by 0.5% against the Canadian dollar, ending the week at C$1.34/$.    

Economic Releases

  • In the US, the federal government February monthly deficit widened to $234.0 billion from $215.2 billion, posting the widest monthly deficit on record. The provisional March release of the Manufacturing Purchasing Managers' Index (PMI) disappointed with the index falling to a twenty-one month low of 52.5 from 53.0, against expectation for an increase to 53.5. Slowing growth was not confined to just the manufacturing sector as the Services PMI also slipped to 54.8 from 56. On a more positive note, existing home sales surged by 11.8% in the month of February, well ahead of the 3.2% increase expected and downwardly revised 1.4% contraction in the previous month. The fastest increase in over three years was fuelled by falling mortgage rates, rising wages and robust consumer confidence. Elsewhere, the Philadelphia Fed Business Outlook rebounded to 13.7 from 4.1 (first negative reading in nearly three years).
  • Euro Area Markit Manufacturing PMI continued to disappoint with the March Preliminary reading falling to 47.6 from 49.3. The German manufacturing sector also disappointed as it fell deeper into contraction territory with the PMI falling to 44.7 from 47.6, the lowest level in 79 months. Both the readings were well below analyst expectation for an improvement to 49.5 and 48 respectively. In Europe, the ZEW Indicator for Economic Sentiment increased sharply to -2.5 in March, the strongest reading since May 2018, compared to -16.6 recorded previously. The German Indicator of Economic Sentiment also improved to -3.6 from -13.4, against expectation of -11.
  • In Japan, headline consumer price inflation remained unchanged at 0.2% for the year to February against expectations of it edging up to 0.3%. Core consumer price inflation, which excludes more volatile food but not energy prices, slowed to 0.7% against forecasts of remaining it at 0.8%. Latest Nikkei manufacturing PMI data reflected tough ongoing conditions for Japan's manufacturing sector; the index remained in contractionary territory with the overall manufacturing index unchanged at 48.9. Sub-components of the index reflected a gloomier outlook with output, new orders and new export orders sub-indices falling at a faster pace than the previous month. The All Industry Activity index fell by a further 0.2% for the month of January but was better than the downwardly revised 0.6% decline in December and the forecasted 0.4% dip.
  • The ongoing trade spat between the U.S. and China remains at the forefront of news-flow. There are scheduled to be further trade talks between both delegations later this week, but any resolution looks some time away with U.S. trade representative Lighthizer noting major issues still exist.

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

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