Weekly Review Brief - July 22, 2019

Posted by FlexShares on Jul 22, 2019 11:22:57 AM

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Global equities pressured by geopolitical tensions.  Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities pressured by geopolitical tensions. Developments last week including heightened U.S.-Iran tensions and U.S. President Donald Trump threatening to impose tariffs on the $325 billion of Chinese goods1, helped lead to a weekly decline for global equities2. U.S. (-1.2%) and non-U.S. developed market (-0.2%) equities declined last week, while emerging markets posted a gain of 0.7%3. The strong 17.5% year-to-date return in global equities, remains driven primarily by developed markets, as emerging market equities lag with a return of 11.1%4.

New York Fed walks back Williams’ comments on rate cuts. Market expectations for a 50 basis point rate cut at the July Federal Reserve meeting fluctuated sharply last week, moving above 60% briefly before finishing the week at 19%. The swing was driven by comments from New York Fed leader John Williams that appeared to call for a 50 basis point rate cut in July. However, the New York Fed took the somewhat unusual step of clarifying Williams’ comments by saying he was speaking in an academic context rather than directly referring to near-term Fed policy. Comments from other Fed officials last week generally supported a 25 basis point rate cut in July, but not a larger move5. Outside the U.S., additional central banks eased policy by cutting rates last week in Indonesia, South Korea and South Africa.

Global inflation remains close to prior readings. June’s Consumer Price Index (CPI) readings generally matched May’s readings across a few major non-U.S. developed markets. Unlike most developed markets, the U.K. continues to float near most central banks’ 2% target with headline and core levels at 2.0% year-over-year (y/y) and 1.8% y/y, respectively. Europe experienced a modest uptick to headline and core inflation levels to 1.3% y/y and 1.1% y/y, respectively, though these increases were nearly identical to consensus expectations.

New President of the European Commission confirmed. Germany’s Ursula von der Leyen was confirmed as European Commission President in a close vote last week, which should help support expectations that the new slate of European leaders will try to work towards deeper European integration6. In the U.K., Parliament members approved legislation to help reduce the odds of a no-deal Brexit, further adding to constraints the next Prime Minister will face in trying to reach a solution on Brexit7.

Low interest rate environment hits bank lending. Most of the largest U.S. banks reporting earnings lowered their outlook for lending income given pressures from lower rates. Early on in the earnings season, 77 S&P 500 (15%) companies have reported results with aggregate earnings growth of 2.1% y/y and sales growth of 2.6% y/y8.


This Week Preview

Main stretch of 2Q earnings season begins this week. A number of companies reporting this week will come from the industrials and communication services sectors. These include Lockheed Martin (LMT), Caterpillar (CAT), Boeing (BA), United Parcel Service (UPS), Facebook (FB) and Alphabet (GOOG). Investors will also closely follow reports from McDonald’s (MCD), Intel (INTC), Starbucks (SBUX) and Amazon (AMZN)9.

Surveys expect mixed flash PMI data in July. The U.S., Japan, Germany and Europe report flash Purchasing Managers’ Index (PMI) readings across the services and manufacturing sectors this week. Surveys show slight upticks across most of the regions in the manufacturing sector, though nearly all regions except the U.S. are expected to remain in contractionary territory (below 50). Services PMI readings across most regions are expected to fall slightly, but remain elevated compared to the manufacturing sector.

ECB expected to set stage for future easing plans. With roughly three months remaining in European Central Bank  (ECB) President Mario Draghi’s term, the ECB meets this Thursday where it may provide more detail on a near-term plan to ease policy by restarting its asset purchase program and possibly cutting rates. Markets generally are not anticipating policy moves in this meeting, but believe the September ECB meeting would be a more likely time to adjust policy. ECB leaders remained concerned about the growth environment in Europe as well as the muted inflation outlook10.

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.

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End Notes

    1. 1. Wagner, Meg. Hayer, Mike. Hammond, Elise. Berlinger, Joshua. CNN. Tensions soar after Iran seizes tanker. Retrieved on 22Jul2019 from https://cnn.com/middleeast/live-news/iran-british-tanker-july-2019/index.html. Burszyntynsky, Jessica. CNBC. Cramer to Trump: More US companies blame tariffs than the Fed for the slowing economy. Retrieved on 22Jul2019 from https://www.cnbc.com/2019/07/19/cramer-to-trump-more-companies-blame-tariffs-than-fed-for-slowdown.html.
    2. 2. Bloomberg, MSCI World Index returns 15Jul2019 – 19Jul2019.
    3. 3. Bloomberg, MSCI U.S. Equities IMI Index 15Jul2019 – 19Jul2019. MSCI World ex-U.S. IMI Index returns 15Jul2019 – 19Jul2019. MSCI Emerging Market Equities Index returns 15Jul2019 – 19Jul2019.
    4. 4. Bloomberg, MSCI World Index returns 02Jan2019 – 19Jul2019. MSCI Emerging Market Equities Index returns 02Jan2019 – 19Jul2019.
    5. 5. Bloomberg, Fed Funds Futures Index 19Jul2019. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.
    6. 6. Bremmer, Ian. Time Magazine. The Quick Read About… the New President- elect of the European Commission. Retrieved on 22Jul2019 from https://time.com/5630399/the-quick-read-about-the-ascendancy-of-ursula-von-der-leyen/.
    7. 7. MacLellan, Kylier. James, William. No-deal Brexit under fire-Parliament grabs brakes against Brois Johnson. Retrieved on 22Jul2019 from https://reuters.com/article/uk-britain-eu-parliament/mps-to-vote-on-latest-bid-to-try-to-prevent-a-no-deal-brexit-idUKKCN1UD0Z6.
    8. 8. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 22Jul2019 from http://lipperalpha.financial.thomsonreuters.com
    9. 9. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 22Jul2019 from http://lipperalpha.financial.thomsonreuters.com
    10. 10. Skolimowski, Piotr. Bloomberg. Draghi Prepares His Legacy for Like-Minided Lagarge as ECB Meets. Retrieved on 22July2019 from https://www.bloomberg.com/news/articles/2019-07-21/draghi-prepares-his-legacy-for-like-minded-lagarde-as-ecb-meets

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