Global equities struggle, Turkey weighs on market and will PMI stay healthy? Find out more in this edition of “The Week in Review.”
Last Week Review
Modest weekly decline for global equities. Global equities fell -0.4% last week,1 as a +0.6% gain in U.S. equities2 was not enough to overcome -1.1% and -3.6% declines in non-U.S. developed markets and emerging markets,3 respectively. Global equities are struggling to stay in positive territory year-to-date (+1.8%),4 with the +8.3% U.S. equities gain5 mostly offset by negative returns across non-U.S. equities.6 In fixed income, the yield curve remains relatively flat7 with the 10-year U.S. Treasury yield (2.86%)8 ending the week 0.25% above the 2-year U.S. Treasury yield (2.61%).9
Pressures on EM continue throughout last week. Emerging market equities continued to struggle last week,10 approaching a 20% decline from previous highs in late January 2018.11 We believe currency weakness and fiscal concerns in Turkey continued to weigh on sentiment in emerging markets early on in the week. Growth concerns in China and disappointing earnings results from one of the largest companies in China (Tencent) were a further drag on emerging markets mid-week.12 More specifically, China economic data released last week was somewhat soft, with retail sales, industrial production, and fixed asset investment all coming in below consensus expectations. However, positive news on trade provided some relief towards the end of last week following the U.S. and China announcing a plan to hold exploratory trade talks in late August and reports that the two countries are seeking to alleviate trade tensions by November.
Europe inflation data in-line with expectations. Europe inflation data was close to consensus expectations, with a headline Consumer Price Index (CPI) reading of 2.1% year-over-year (y/y) and a core CPI figure of 1.1% y/y. In addition, UK inflation data was released last Wednesday, with headline and core inflation largely in-line with both prior levels and consensus expectations. UK CPI ticked up to 2.5% y/y, while UK core CPI remained at 1.9% y/y. After peaking at 3.1% y/y in November 2017, UK CPI has gradually moved back down towards the Bank of England’s 2% target, decreasing the odds that the central bank will look to hike rates for a second time in 2018. Markets currently expect about a 6% probability of an additional rate hike by year-end.
Earnings season closes in on finish line. Second quarter earnings season is largely complete, where 465 S&P 500 companies (93%) have reported results. Aggregate year-over-year earnings growth (+25.5%) and revenue growth (+9.8%) remain very strong and above their respective consensus expectations.13 Earnings growth is in double digits across each sector,14 aside from the real estate sector’s +6.6% year-over-year earnings growth.15
This Week Preview
EU-U.S. trade talks continue, while U.S. further pressures China. Trade officials from the European Union (EU) and the U.S. will meet in Washington this Monday. The talks are expected to focus on lowering tariffs in addition to the possibility of increasing U.S. energy and agriculture exports. A breakdown in the talks could re-ignite concerns that the trade skirmish primarily between the U.S. and China could extend to a global trade war. Regarding China, another round of U.S. tariffs on $16 billion worth of China goods is set to go into effect this Thursday, while a comment period is scheduled to take place throughout the week on U.S. tariffs on an additional $200 billion in China exports.
Global flash PMI data expected to remain healthy. Flash Purchasing Managers’ Index (PMI) data will be released this week across Japan, Europe, and the United States. The flash manufacturing PMIs are expected to remain well into expansionary territory (above 50) across the major developed markets. The U.S. manufacturing PMI has hovered around 56 throughout 2018 so far, while the Europe reading declined from 59.8 at the start of the year but has since settled in around 55 in recent months.
Central bankers head to Jackson Hole summit. The Federal Reserve Bank of Kansas City’s annual monetary policy summit starts this Thursday. No major announcements are expected, though Fed Chair Jerome Powell was added to the agenda late last week and is expected to speak on monetary policy in a changing economy.
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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.
1) Bloomberg, MSCI World Index returns 13Aug2018 – 17Aug2018.
2) Bloomberg, MSCI U.S. Equities IMI Index returns 13Aug2018 – 17Aug2018.
3) Bloomberg, MSCI ex-U.S. Equities IMI Index and MSCI Emerging Market Equities Index returns 13Aug2018 – 17Aug2018.
4) Bloomberg, MSCI World Index returns 02Janl2018 – 17Aug2018.
5) Bloomberg, MSCI U.S. Equities IMI Index returns 02Janl2018 – 17Aug2018.
6) Bloomberg, MSCI ex-U.S. Equities IMI Index returns 02Janl2018 – 17Aug2018.
7) Bloomberg, Yield curve as of 17Aug2018 and is constructed by plotting a sessions final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year maturities. In this example, we are comparing the yield as of a certain date between the TYPE and the TYPE maturing instruments.
8) Bloomberg, 10-Year Treasury Rate 17Aug2018.
9) Bloomberg, 2-Year Treasury Rate 17Aug2018.
10) Bloomberg, MSCI Emerging Market Equities Index return 13Aug2018 – 17Aug2018.
11) Bloomberg, MSCI Emerging Market Equities returns 02Janl2018 – 17Aug2018.
12) Bloomberg, MSCI Emerging Market Equities Index return 13Aug2018 – 17Aug2018.
13) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 17Aug2018 from http://lipperalpha.financial.thomsonreuters.com/2018/08/this-week-in-earnings-9/.
14) Bloomberg. S&P 500 year over year earnings growth comparison 17Aug2017 versus 17Aug2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector. The Global Industry Classification Standard (GICS) is an industry taxonomy developed in 1999 by MSCI and Standard & Poor's (S&P) for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries into which S&P has categorized all major public companies. GICS is used as a basis for S&P and MSCI financial market indexes in which each company is assigned to a sub-industry, and to a corresponding industry, industry group and sector, according to the definition of its principal business activity.
15) Bloomberg. S&P 500 - Real Estate Index year over year earnings growth comparison 17Aug2017 versus 17Aug2018 comprising those companies included in the S&P 500 that are classified as members of the GICS® financials sector. The GICS structure consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries into which S&P has categorized all major public companies. GICS is used as a basis for S&P and MSCI financial market indexes in which each company is assigned to a sub-industry, and to a corresponding industry, industry group and sector, according to the definition of its principal business activity.
Past performance is no guarantee of future results. It is not possible to invest directly in any index and index performance returns do not reflect any management fees, transaction costs or expenses.