Global equities recover, oil’s response to deal exit and what impact will NAFTA negotiations have on the market? Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities recover after 2-week slide. Global equities returned 2.2% last week,1 with solid returns across each major region. U.S. equities gained 2.5%,2 while emerging market equities and non-U.S. developed market equities saw gains of 2.3%3 and 1.7%,4 respectively. U.S. equities lead all major regions in 2018 at 3%,5 followed by non-U.S. developed markets at 1.9%6 and emerging markets at 0.9%.7 The 10-year U.S. Treasury ended the week up slightly at 2.97%,8 while the 2-year Treasury yield moved up as well to 2.54%.9 This left the spread between the 10-year and 2-year U.S. Treasury yields at 0.43%,10 which is close to the lowest level observed in 2018.11
BOE holds rates steady, no major surprises in U.S. inflation data. The Bank of England (BOE) met on Thursday last week, where it opted to maintain current interest rate policy. The BOE lowered its 2018 growth forecast, though BOE Governor Mark Carney expressed optimism that the recent slowdown in growth would be transitory. We believe markets are now expecting a 62% probability of a BOE rate hike by the end of 2018. Back across the Atlantic, U.S. inflation data was largely in-line with expectations with a Consumer Price Index (CPI) reading of 2.5% year-over-year (y/y) and a core CPI reading of 2.1% y/y. We believe the core CPI measure was a bit below consensus and even with the prior month’s figure. A June Federal Reserve rate hike remains fully priced in by the market according to Fed funds futures.12
President Trump exits the Iran nuclear deal. President Donald Trump announced his decision to withdraw the U.S. from the Iran nuclear accord last Tuesday. Though broader financial markets were not affected, oil prices moved up about 3% in the day following the announcement.13 The possibility of U.S. sanctions could limit Iran oil exports in the near-term, while additional uncertainty in the Middle East could also affect the global oil market longer-term. The U.S. move on the Iran deal may also have carry-over implications to the U.S.-North Korea talks. The ongoing dialogue between the U.S. and North Korea may become viewed as more closely related to developments on talks between the U.S. and China on tariffs and intellectual property.
Recent trends continue as earnings season nears completion. 454 S&P 500 companies (91%) have reported earnings so far, with earnings growth of 23.8% y/y exceeding expectations by 7.3%.14 Revenue growth has also topped consensus estimates, with revenue growth of 8.3% y/y beating expectations by 1.2%.15
This Week Preview
Finish line in sight for earnings season. The main part of the Q1 2018 earnings season wraps up this week, with most companies that have yet to report falling in the consumer discretionary and technology sectors. Home Depot (HD), Walmart (WMT), Cisco Systems (CSCO) and Deere & Co (DE) are among the noteworthy companies reporting earnings this week.
Europe core inflation expected to stay near prior level. Europe inflation data will be released on Wednesday this week. We believe Europe CPI and core CPI will remain near prior levels at 1.2% y/y and 0.7% y/y, respectively. Europe core CPI remains well below the European Central Bank’s (ECB) 2% target and also lower than levels observed over the last twelve months. Inflation data will also be released in Germany this week, with consensus expectations calling for Germany CPI to be consistent with the prior reading at 1.6% y/y.
NAFTA and U.S.-China trade talks remain on investors’ radar. NAFTA negotiations are broadly expected to wrap up some time in mid-May, though this is by no means a concrete deadline. Talks on trade between the U.S. and China are expected to continue this week as well with China Vice Premier Liu He heading to Washington this week. The U.S.-China trade relationship may receive more attention later this month as the threatened tariffs could potentially start to go into effect in late-May.
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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.
- Bloomberg, MSCI World Index returns 07May2018 – 11May2018.
- Bloomberg, MSCI U.S. Equities IMI Index returns 07May2018 – 11May2018.
- Bloomberg, MSCI Emerging Market Equities Index returns 07May2018 – 11May2018.
- Bloomberg, MSCI ex-U.S. Equities IMI Index returns 07May2018 – 11May2018.
- Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2018 – 11May2018.
- Bloomberg, MSCI ex-U.S. Equities IMI Index returns 02Jan2018 – 11May2018.
- Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2018 – 11May2018.
- Bloomberg, 10-Year Treasury Rate 07May2018 – 11May2018.
- Bloomberg, 2-Year Treasury Rate 07May2018 – 11May2018.
- Bloomberg, In this analysis we are making a comparison between the difference of the 2-Year nominal Treasury rates versus the 10-Year nominal Treasury rates using data available as of 11May2018. Basis Point (BPS) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
- Bloomberg, In this analysis we are making a comparison between the difference of the 2-Year nominal Treasury rates versus the 10-Year nominal Treasury rates using data available for the period of 02Jan2018 - 11May2018.
- Bloomberg, Fed Funds Futures Index 11May2018. 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.
- Bloomberg, Dow Jones Crude Oil Commodity Index returns 09May2018. The index is designed to track the Brent Crude market through futures contracts. All Dow Jones Commodity Indexes are broad measures of a commodities futures market that emphasizes diversification and liquidity utilizing an equal-weighted approach.
- Aurelio, D. “S&P 500 Earnings Dashboard, May 11.” Thomson Reuters. Retrieved on May 14, 2018 from http://lipperalpha.financial.thomsonreuters.com/2018/05/sp-500-17q1-earnings-dashboard/.