Trade tensions, earnings season week 2 and how will geopolitics impact the market? Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities recover after trade tensions remain contained. Global equities returned 1.7% last week1, helped by U.S. equities at 2.0%2. Developed ex-U.S. and emerging market equities gained 1.5%3 and 0.8%4, respectively, putting all major regions in positive weekly territory. Year-to-date, global equities are roughly flat (0.2%)5, with emerging markets leading the major regions at 1.5%6 followed by developed ex-U.S. markets (0.2%)7 and the U.S. (0.1%)8. The yield curve in the U.S. remains relatively flat, with the spread between the 10-year U.S. Treasury yield and the 2-year U.S. Treasury yield at 0.47%9.
Trade tension escalation between U.S. and China takes a pause. After back-and-forth tariff threats over the past few weeks, trade tensions temporarily eased between the U.S. and China. China President Xi Jinping pledged to reduce tariffs on imported vehicles and give greater access to markets from foreign investors at the Boao Forum. Headlines continue to focus on President Donald Trump’s comments on potential trade actions, Syria and the Russian election interference investigation. Republican House Speaker Paul Ryan also announced that he will not seek re-election, which is likely to decrease the already relatively low odds for entitlement reform related to Social Security, Medicare and Medicaid programs.
Headline U.S. inflation moves higher. As expected, headline and core Consumer Price Index (CPI) data increased from prior readings to 2.4% and 2.1%, respectively, on a year-over-year basis (y/y). A key driver of the higher figures was an unusual drop in mobile phone services pricing in March 2017 rolling out of the calculation. Fed fund futures moved modestly higher last week and show about an 87% probability of a June Federal Reserve rate hike. Minutes from the March Fed meeting showed optimism on economic growth and inflation’s movement toward the 2% target over the medium term as measured by core Personal Consumption Expenditure (PCE).
Facebook’s Zuckerberg testifies before Congress. Following the mid-March revelation of improper data usage by Cambridge Analytica, Facebook CEO Mark Zuckerberg appeared before Congress for questioning last week. No immediate regulations followed the testimony but the possibility of heavier regulation remains an overhang for the technology sector. Over the last month, the sector is down 5.0%. Also, earnings season began with large banks Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) all topping expectations. We believe investors expect high earnings growth overall on a year-over-year basis as benefits from tax cuts kick in.
This Week Preview
Week two of earnings season focuses on financials. Notable companies reporting out of the financials sector include Bank of America (BAC), Goldman Sachs (GS), and American Express (AXP). Investors will also keep a close watch on Johnson & Johnson (JNJ), UnitedHealth Group (UNH), General Electric (GE), Schlumberger (SLB) and Procter & Gamble (PG), reporting from various industries.
Global inflation data expected to remain near prior levels. The UK and Europe post core and headline inflation figures this week that are expected to be in-line with prior levels. The Bank of England will be looking to see if its late 2017 rate hike has helped to slow inflation leading up to its next meeting. Meanwhile, the European Central Bank will continue to look for an uptick in inflation toward its 2% target as it attempts to slowly normalize monetary policy over the next few years. Survey data for this week’s inflation data release in Japan show a drop in the headline figure to 1.1% y/y from last month’s reading of 1.5% y/y, while core inflation is expected to remain unchanged at 0.5% y/y.
Geopolitics remain in focus this week. Following an alleged chemical attack in Syria, the U.S., France and the UK took retaliatory measures over the weekend which could impact U.S.-Russia relations. In addition, President Trump is set to meet with Japan Prime Minister Shinzo Abe to discuss trade and North Korea. In Europe, France President Emmanuel Macron will meet with Germany Chancellor Angela Merkel.
Click here to view the full report.
Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.
- Bloomberg, MSCI World Index returns 09Apr2018 – 13Apr2018.
- Bloomberg, MSCI U.S. Equities IMI Index returns 09Apr2018 – 13Apr2018.
- Bloomberg, MSCI ex-U.S. Equities IMI Index returns 09Apr2018 – 13Apr2018.
- Bloomberg, MSCI Emerging Market Equities Index returns 09Apr2018 – 13Apr2018.
- Bloomberg, MSCI World Index returns 02Jan2018 – 13Apr2018.
- Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2018 – 13Apr2018.
- Bloomberg, MSCI ex-U.S. Equities IMI Index returns 02Jan2018 – 13Apr2018.
- Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2018 – 13Apr2018.
- Yield curve as of 13Apr2013 and is constructed by plotting a sessions final yields for various maturities.