Week in Markets (Week Ending May 12, 2019)

May 13, 2019

Equities

  • U.S.-China trade negotiations broke down last week with the two nations failing to reach a deal. Consequently, tariffs on Chinese imports worth approximately $200 billion were increased from 10% to 25%. Furthermore, as stated by U.S. Trade Representative Robert Lighthizer, the U.S. President Donald Trump also ordered the U.S. Department of Commerce to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion.
  • Elsewhere, tensions in the Middle East rose as Iran threatened to unravel its nuclear agreement sealed in 2015 following the re-imposition of U.S. sanctions. Iranian president Hassan Rouhani said that Iran was no longer receiving economic benefits promised under the deal in exchange for accepting restrictions on its nuclear program.
  • The European Commission cut its growth forecasts to 1.2% and 1.5% from 1.3% and 1.6% for 2019 and 2020 respectively amid uncertainty over trade conflicts and continued weakness in the auto industry.
  • The S&P 500 fell by 2.1%, marginally outperforming the MSCI World index, which fell by 2.2% over the week. On a year-to-date basis, the S&P 500 index has outperformed the MSCI World index (15.8% vs 14.1%). 
  • U.S. Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 index fell by 2.1% while the Russell 2000 index fell by 2.5%. However, on a year-to-date basis, the S&P 500 Index has underperformed the Russell 2000 Index (15.8% vs 17.2%). Growth stocks fell by 2.3% and Value stocks fell by 1.9% 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 (19.5% vs 12.7%).

Bonds 

  • The 10-year U.S. treasury yield fell by 9bps to 2.46% and the 30-year U.S. treasury yield fell by 7bps to 2.88%. The 20-year TIPS yield fell by 5bps to 0.79% while the 20-year breakeven inflation fell by 3bps to 1.90%. 
  • The spreads on the Bloomberg Barclays Capital Long Credit Index rose by 6bps to 166bps and the Bank of America Merrill Lynch U.S. Corporate Index rose by 4bps to 122bps. The U.S. high yield bond spread over U.S. treasury yields rose by 27bps to 399bps. The spread of USD denominated EM debt over U.S. treasury yields rose by 15bps to 359bps over the week.

Commodities   

  • The S&P GSCI index fell by 1.2% in USD terms over the week. The S&P GSCI Energy index fell by 0.5% as the price of WTI Crude oil fell by 0.5% to US$62/BBL. Industrial metal prices fell by 1.5% as copper prices fell by 0.7% to US$6,136/MT. Agricultural prices fell by 4.3% and gold prices rose by 0.7% to US$1,287/Oz.   

Currencies 

  • The U.S. dollar had a mixed performance against major currencies over the week. The U.S. dollar appreciated by 0.7% against sterling, ending the week at $1.30/£. The U.S. dollar depreciated by 0.5% against the euro, finishing the week at $1.12/€. The U.S. dollar depreciated by 1.5% against the Japanese yen, ending the week at ¥109.61/$. The U.S. dollar appreciated by 0.1% against the Canadian dollar, ending the week at C$1.34/$.   

Economic Releases

  • In the U.S., the Consumer Price Index (CPI) rose by 0.3% in the month of April, against the expectation of inflation (on a monthly basis) remaining at 0.4%. However, on an annual basis, inflation met expectations and edged up to 2.1% from 1.9%. Core inflation, which excludes volatile food and energy components, similarly inched higher to 2.1% from 2.0%, as expected. The uptick in inflation led to a slowing in real wage growth with real average weekly earnings growth decelerating to 0.9% in the year to April, following on from the upwardly revised 1.4% growth recorded in the year to March. The trade deficit in March widened to $50.0bn from $49.3bn previously, against expectations of a widening deficit of $50.1bn. Over the same period, the trade deficit with China fell to the lowest level in five years.
  • In the Euro Area, retail sales growth slowed to 1.9% in the year to March from upwardly revised 3.0% growth recorded previously but was better than 1.8% growth expected. The Sentix Investor Confidence index rose to 5.3 in May, rebounding sharply from the previous reading of -0.3 and significantly ahead of the expected reading of 1.2. In Germany, industrial production rose by 0.5% against expectation for a 0.5% contraction. The German trade surplus increased to €22.7 billion in March from €18.0 billion, beating expectation of €20.0 billion surplus.  Both export and import growth rebounded, rising by 1.5% and 0.4% respectively from 1.2% and 1.6% contraction in the previous month.
  • In Japan, labor cash earnings fell the most since June 2015 with earnings declining by 1.9% on a year-on-year basis in March following a 0.7% contraction in the previous month. Once adjusted for inflation, wages fell by 2.5%, furthering the 1.0% fall in wages from the upwardly revised 1.0% decline recorded in the previous month. Both readings were significantly below the respective 0.5% and 1.1% contractions forecasted. Elsewhere, the manufacturing sector returned to the expansionary territory as indicated by the final reading of Nikkei Manufacturing PMI which rose to 50.2 in April from 49.5. The Nikkei Services PMI slipped to 51.8 in April from 52.0 but nonetheless, the overall composite PMI moved higher to 50.8 from 50.4. 
  • In China, exports unexpectedly fell by 2.7% in the year to April, against analyst forecasts of a 3.0% increase and significantly below the downwardly revised 13.8% increase seen in the previous month. Conversely, a similar contraction was not shared by imports in China which rebounded by 4.0% over the same period, well ahead of an estimated decline of 2.1% and downwardly revised decline of 7.9% recorded previously. Consequently, the trade surplus narrowed sharply to US$13.84bn from US$32.42bn and well below consensus estimates of a US$34.56bn surplus. Consumer price inflation met analyst forecasts and rose to a six-month high with inflation accelerating to 2.5% in the year to April from 2.3% previously. The increase in inflation stemmed largely from rising food prices. Elsewhere, new loan issuance in China slowed to CNY1020.0bn in April, below the CNY1690.0bn recorded in the previous month and the forecasted issuance of CNY1200.0bn.

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

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