The US equity market has witnessed a lot of volatility during last week. The trade war with China has weighed on all the three major indices: S&P 500 lost 1.38%, Nasdaq and Dow Jones scored -2.10% and -0.71% respectively.
On Monday, the slide of some big Tech firms led the Nasdaq to lead losses. Amazon shares lost 5.21% on the day as President Trump criticised the company and promised some measures to help retail stores. Tesla lost 5.12% too, as fears over the delay in Model 3 deliveries.
On Thursday, Trump instructed the US Representative office to consider an additional tariff on $100 billion on Chinese imports, bringing total tariffs to a total of $150 billion of products. That would put China in an awkward position, as total US exports to China are just $115 bn, so that China could not fully retaliate on that front. However, all three major indices lost over 2% on Friday.
Non-farm payrolls figure was also published, which showed a job growth to six-moths low (103,000 jobs added vs 185,000 expected) and unemployment steady at 4.1%. The US dollar strengthened 0.32% against EUR (EURUSD at 1.2281) while losing 0.53% to GBP (USD GBP at 0.7096). Finally, the yield on 10-year Treasuries increased to 2.77%, but fell on Friday as many investors sold equities to buy safer assets like bonds and gold. It is worth mentioning that on Friday, the S&P 500 index closed below the 200-moving average.
This week several indicators were released in the eurozone. Eurostat released the unemployment data for March, which indicated an 8.5% unemployment rate in the eurozone, the lowest since the financial crisis and 0.1% below the 8.6% forecast, and the inflation rate for the month, which, while still below the ECB target, increased to 1.4%, compared to the 1.1% of the previous year in the same month. Finally, the eurozone manufacturing PMI for march was released by HIS Markit, with a value of 56.6, lower than the 58.6 of February and setting a low for the 15-month period, a quite significant decline.
Continuing sessions of overall volatile trading, despite dipping on Friday due to the escalation of the “trade war” stance between the United States and China, major equity indexes closed positively (DAX 30 +1.99%, FTSE MIB +1.86%, CAC 40 +2.06%, Euro Stoxx 50 +1.83%), all continuing a two-week positive trend, but still below their monthly highs.
At the same time in the bond market most countries treasury yields in the eurozone spiked on Thursday due to the relatively high inflation rate reported the 4th of April, before reverting to their previous level (10Y bunds spiked at 0.524% on Thursday before falling back at 0.497%, while French 10Y bond yields closed at 0.736%, and Italian 10Y bonds closed at 1.786%, with a slightly less strong basis point change compared to Germany). Overall treasuries remained fairly stable during the weekly period, with non-significant changes in yields.
The EUR/USD and EUR/GDP couple, continued to diminish in value over the week, respectively by -0.34% and -0.82%, continuing the monthly euro relative depreciation trend.
Finally, several events are happening in the eurozone from a political standpoint: In Italy uncertainty continues to permeate concerning how will the government be formed: unexpectedly “good” or “bad” scenarios remain a possibility for the markets. In France a big railway strike has started as workers fight a recent reform proposed by president Macron to increase competition in transportation: if an agreement is not reached, minor, but significant economic disruption could be expected in the country, especially in tourism and tourism related industries.
Over the past weeks, the major news for the UK economy was a breakthrough in the Brexit negotiations when a transitional trade deal was agreed on 19th March. This deal provides for another 20-month-long transition period, during which Britain will stay in the single market and customs union after it leaves the EU in March 2019. During this period, the UK will have the time to negotiate and sign new free trade agreements with the EU. Despite heavy criticism throughout the past weeks, the deal has resolved some uncertainty in the markets.
The moment Donald Trump started announcing tariffs on imports from China and Europe, this ephemeral safety vanished and uncertainty rose again. Luckily, risks of a trade war dissipated as the US focused its measures on China and backtracked on high tariffs for European imports.
On the back of these developments, the FTSE 100 recovered from its end of March figure of 7,056 to close this week at 7,183.64 points, up by 1.8%. Likewise, the pound appreciated slightly against the US dollar to 1.4092 from its previous end of week value of 1.4015. The 10 year UK gilt yield increased slightly 10 yield 1.396% compared to 1.35% one week ago.
The slight increase in bond yields may be due to the low construction and services PMI estimates for March published last week at 47.0 and 51.7, respectively. The bad weather of the “Beast of the East” is held responsible for this downturn, however, the general expectation is that it will not last and construction and services will pick up in the coming months again.
A further development not reported in our market recaps during the break, was the BoE decision to keep interest rates at 0.5% unchanged (vote 7-to-2). This decision was based on the back of lower inflation figures in February at 2.7% than in January at 3%. The BoE expects inflation pressures to ease, although the inflation figure is likely to remain above the 2% target for the short term period.
During the next week, we can expect estimates of the February industrial and manufacturing production and construction output in the UK, as well as the February balance of trade estimate.
Rest of the World
The Brazilian Senate has convicted Lula da Silva on grounds of bribery, sentencing the politician leading the polls to a 12-year sentence. This invariably ends the populist’s presidential ambitions, barring a successful appeal.
The liberal Carlos Alvarado nabbed Costa Rica’s presidential election, triumphing over his conservative rival. A relative outsider, Carlos would the youngest since local history. Hope abounds, though Costa Rica’s economic malaise would entail a deft handling of the country’s politics.
South Korea’s besmirched ex-president was sentenced to a 24-year prison term. Embroiled in a scandal that abused power with cultish undertones, Park Geun-hye is startling, the fifth to be impeached on cronyism and graft. Samsung’s scion, Lee Jae-yong, walked off scot-free as his sentence of 5-years for corruption was suspended.
Malaysia’s prime minister has dissolved the parliament and set in motion for an election in 2 months. Najib Razak’s current tenure has been dogged by whispers of embezzlement and graft. The 1MDB scandal was received with indifference amongst the local populace. His archrival is Mahathir Mohamad, head of the opposition who was once a prime minister under the very same party.
Markets wobbled as the shadow of a probable trade war looms. China and America exchanged blows as the dispute escalated dramatically. This bellicose rhetoric comes as the Trump administration demands that the Chinese cut its trade surplus with America by USD $100 billion. Soy beans, a key American export to China, tumbled.
Alibaba devoured China’s largest food company, Ele.me, for USD $9.5 billion. The largest Chinese companies are duking it out in the online-to-offline market, salivating over the prevalence of Chinese consumers’ preference of brick-and-mortar stores.
Markets wobbled as the shadow of a probable trade war looms. China and America exchanged blows as the dispute escalated dramatically. This bellicose rhetoric comes as the Trump administration demands that the Chinese cut its trade surplus with America by USD $100 billion. Soy beans, a key American export to China, tumbled. Gold, a safe haven asset, fluctuated from USD $1319.62 to USD $1,348.22 accordingly, as investors hedged their exposures. Oil ended down for the week, with WTI and Brent at USD $61.90 and USD $67.00 respectively, exacerbated by China’s introduction of the renminbi-denominated oil futures. This is seen as the latest of moves aimed at breaking America’s domination of oil futures. Saudi Arabia’s attempt to wean off oil with its solar alliance with Softbank further depressed oil prices.