Global equities sold off this week on mounting political concerns centred on the Trump administration, raising fears that mooted plans for US tax cuts, infrastructure spending and deregulation could be delayed, or even fail to materialise at all
Brazilian assets sold off sharply on the back of a political scandal engulfing reformist President Michel Temer
China’s April activity data showed weaker growth in industrial production, fixed asset investment and retail sales
In the coming week, US data releases will be in focus, including the second estimate of Q1 GDP. Meanwhile, a highly anticipated OPEC meeting on 25 May will be of significance to oil markets
Most equity markets sold off on mounting political concerns centred on the Trump administration
US stocks ended moderately lower after a turbulent week. Both the S&P 500 Index and the Nasdaq touched fresh record highs on Tuesday, but sold off mid-week as political turmoil in Washington raised doubts about the administration’s ability to implement pro-growth policies. A partial recovery ensued when upbeat economic data, in particular jobless claims and industrial production, boosted confidence in the economy. Overall, the S&P 500 Index ended the week 0.4% lower.
After a strong start this week, European equities also declined as concerns about the prospect for pro-growth policies in the US spilt over into European markets. The EURO STOXX 50 Index ended the week down 1.4%, although energy stocks outperformed, benefitting from a rally in oil. Meanwhile, UK stocks outperformed as upbeat retail sales data supported confidence in the economy, despite sterling breaching the USD1.30 level for the first time since September last year. The FTSE 100 Index closed up 0.5% on the week.
Asian stock markets were volatile this week amid concerns about US political and policy uncertainty, although higher oil prices provided some support. Japan’s Nikkei 225 Index fell 1.5%, weighed on by a stronger yen, despite better than expected Q1 real GDP data. China’s Shanghai Stock Exchange Composite Index rose 0.2%, snapping a five-week stream of losses, as concerns over tighter liquidity and financial regulations eased, offsetting disappointing economic data for April. India’s SENSEX Index posted a weekly gain of 0.9%, boosted by much lower than expected April CPI inflation, improved prospects of monsoon rainfalls, optimism over the Goods & Services Tax overhaul and some positive earnings releases. Meanwhile, Indonesia’s Jakarta Stock Exchange Composite Index rallied 2.1%, after a major ratings agency raised the country’s credit rating to investment grade, citing an improvement in fiscal metrics on the back of a successful tax Amnesty.
US and eurozone government bond yields fell on “safe-haven” demand amid US political controversy
US Treasuries rallied (yields fell) as US political concerns increased demand for safety assets amid expectations that President Donald Trump’s mooted pro-growth policies (tax cuts, infrastructure spending, and deregulation) are now likely to be delayed. This also weighed on the near-term market-implied US Federal Reserve (Fed) rate hike expectations. Overall, the Treasury yield curve bull flattened, with two-year yields little changed at 1.27%, and 10-year yields falling 9 bps to 2.23%.
Eurozone government bonds gained (yields fell) as political controversy in the US reduced global risk appetite. German 10-year bund yields closed the week down 2 bps to 0.37% while French 10-year yields fell 4 bps to 0.80%. In the periphery, Portuguese government bonds outperformed amid easing concerns over the country’s banking sector and potential ratings downgrades.
US dollar declined on US political concerns
The US dollar depreciated against most developed market currencies this week as elevated political risks in the US raised the likelihood of a delay to the Trump administration’s pro-growth policy agenda. Against the US dollar, the euro closed the week up 2.5%, while sterling rose 1.1%, also supported by better than expected UK economic data releases this week, including April retail sales.
Most Asian currencies rose against a broadly weaker US dollar, led by the Japanese yen and Singapore dollar. The yen rallied as global risk aversion boosted demand for perceived “safe-haven” assets, before stabilising later in the week.
Oil prices rebounded on weaker dollar, further decline in US inventories ahead of OPEC meeting
Crude oil prices advanced for the second consecutive week, with support coming from a weaker US dollar and the US Energy Information Administration weekly report that showed US crude inventories fell for the sixth straight week (-1.75 million barrels) last week. This came ahead of the 25 May OPEC meeting, where major oil producers are expected to extend output cuts. Overall, WTI for July delivery closed up (+5.6% at USD50.5 a barrel) while equivalent contracts for Brent also finished higher (+5.8% to USD53.8 a barrel).
Gold prices also rose(+2.3% to USD1,256), supported by subdued risk appetite, a weaker US dollar and a dip in the market-implied probability of a Fed rate hike in June, boosting the non-yield-generating asset.