E Markets: Retrenchment

Market Recap: The US/China trade war continues to be front and center as a concern, even with China closed for the New Lunar Year holiday this week, the pressure from China growth fears and trade issues dominated – with Trump casting doubt on a March 1 deal. Most still believe that the President won’t hike tariffs from 10% to 25% despite the deadline. The other issue for the week was European growth. German industrial production dropped in December, off 0.4% from November. Manufacturing orders fell 1.6% during the same time, led by a sharp drop in orders from outside the Eurozone. Compared with December 2017, orders dropped 7%.

Equities: The MSCI all-country World Index fell 0.55% to 488.72 on the week – ending a six-week winning streak. The MSCI EM Index fell 1.36% to 1036.03 on the week. With 66% of the S&P500 reported for 4Q earnings, 71% beat EPS and 62% beat revenue estimates. The blended earnings growth rate is now 13.3% - above the 12.1% at end of December and the 5thquarter of double-digit gains.  

 

  • The S&P500 rose 0.05% to 2,707.88 on the week. The DJIA rose 0.17% to 25,106.33 on the week. The NASDAQ rose 0.47% to 7,298.20 on the week. The Cboe VIX fell 0.42pp or 2.6% to 15.72% on the week. 
  • The Stoxx Europe 600 fell 0.46% to 358.07 on the week. The German DAX fell 2.45% to 10,907.78 on the week. The French CAC40 fell 1.15% to 4,961.64 on the week. The UK FTSE rose 0.73% to 7,071.18 on the week while the Italian FTSE MIB fell 1.15% to 19,351.90. 
  • The MSCI Asia Pacific Index fell 0.88% to 154.88 on the week– with much of the region closed during the week for new lunar year celebrations. The Japan Nikkei fell 2.19% to 20,333.17 on the week. Hong Kong fell 0.16% to 27,946.32 on Friday – the only day it opened this week. The China Shanghai Composite was closed all week. The Korea Kopsi fell 1.20% to 2,177.05 on the week (also closed for much of the week). The India CNX Nifty index rose 0.46% to 10,943.60 on the week. The Australian ASX jump 3.38% to 6,136.20 with the RBA shift driving bonds sharply higher. 

Fixed Income: Supply was met by bigger demand this week as the US auctions and the EU sales were a sideshow to the central bank meetings and forecast cuts. The biggest mover was in Australia as a rate hike was flipped to a rate cut.  Europe saw more yield curve flattening with German negative rates creeping from 5Y to 9Y back to 2016 lows. The drop in EU rates wasn’t universal as the bank pain trade hit Italy further.  

 

  • US bonds rallied despite supply, curve bull steepens– For the week - 2Y off 4bps to 2.47%, 3Y off 6bps to 2.43%, 5Y off 6bps to 2.44%, 10Y off 5bps to 2.63%, 30Y off 3bps to 3.00%. 
  • Canadian 10-year bond yields fell 8bps to 1.88% on the week– despite strong jobs report, BOC and oil counter. 
  • Japan JGB yields fell 1bsp to -0.03% on the week– US/China trade, weaker confidence driving.
  • Australian 10-year bond yields fell 17bps to 2.08% on the week– RBA SOMP cut on growth, Lowe’s neutral stance driving. 
  • UK Gilt yields fell 10bps to 1.15% on the week– Brexit politics still driving along with weaker data and BOE cutting forecasts, rate path shift.
  • German Bund yields fell 8bps to 0.09% on the week– further growth forecast gloom, more safe-haven buying with 0% and 0.15% keys.
  • French OAT yields fell 4bps to 0.54% on the week– mixed data and confidence but focus is on debt dynamics and politics.
  • Italian BTP yields rose 24bps to 2.97% on the week– recession, bad banks, ugly politics and 3% as key for next pain trade
  • Spanish Bono yields flat at 1.23% on the week– gained against Italy, focus is on election next, better growth.
  • Portugal 10-year bond yields rose 1bps to 1.65% on the week– focus is on growth/budget.
  • Greek 10-year bond yields rose 10bps to 4.02% on the week– again 3.90% key resistance with Italy comparisons driving. 

Foreign Exchange: The US dollar index rose 1.1% to 96.64 on the week. US rate spreads were one factor for the bounce, growth concerns and relative equity gains the other. In emerging markets, lighter volume given Asia holidays, mixed result - LATAM mixed: MXN 19.07 up 0.1% on the week, BRL 3.7290 off 1.9% on the week – all about Vale fallout, ARS off 1.9% to 37.82; EMEA weaker: TRY off 075% to 5.246 on the week, RUB flat at 65.46, ZAR 13.618 off 2.3%; ASIA mixed: KRW off 0.45% to 1123.50 and INR up 0.35% to 71.16 despite RBI surprise. 

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