Weekly Review Brief - May 20, 2019

Posted by FlexShares on May 20, 2019 6:00:00 PM

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Walmart topped earnings estimates for the first quarter and also announced a one-day shipping program. Find out more in this edition of “The Week in Review.”

Last Week Review

Emerging markets hit hard by rising trade tensions. After a rough start last week following news that China would be raising tariffs on the U.S., global equities partially recovered and finished down 0.7%1. Increased trade and geopolitical risks including U.S.-Iran tensions and attacks on Saudi Arabia energy assets, were somewhat offset by solid U.S. earnings results and increased expectations that the Fed will ease policy in 20192. Emerging market equities (-3.5%) saw a sharp decline last week compared to a more modest loss in the U.S. (-0.9%) and a slight gain by non-U.S. developed markets (0.2%)3. The recent bout of market volatility has spread out the year-to-date returns across regions with the U.S. leading at 15.3%, followed by non-U.S. developed markets (11.2%) and emerging markets (3.5%)4. Emerging market equities have been affected the most by the recent trade developments, down about 8% over the last two weeks, compared to roughly 3% declines in developed markets5.

U.S.-China trade tensions continue to rise. After the recent increase in U.S. tariffs on Chinese goods, China responded last Monday by raising tariffs on $60 billion of U.S. products. To provide more leverage against China, President Donald Trump signed an executive order that bans U.S. companies from using telecom equipment created by China’s Huawei as it is deemed a national security risk. The U.S. is also looking into placing tariffs on an additional $325 billion of Chinese goods. Aside from China, the U.S. improved trade relations including delaying possible tariffs on autos from Europe and Japan and agreeing to remove steel and aluminum tariffs on Canada and Mexico6.

U.S. economic data remains in good shape overall. Retail sales data in the U.S. was below the prior level and expectations with a 0.2% month-over-month decline, though some of this was attributed to carryover from a strong March reading. However, concerns on the U.S. consumer were overcome by a strong upward move in U.S. consumer sentiment data late last week as well as constructive housing market data. In China, fixed asset investment, industrial production and retail sales fell short of prior levels and expectations. Despite some signs of economic softening, China is expected to boost stimulus measures to offset potential growth headwinds from trade tensions.

Walmart announces rollout of next day shipping. Walmart topped earnings estimates for the first quarter and also announced a one-day shipping program to better compete with Amazon7. The broader earnings season is almost complete with 459 S&P 500 companies (92%) having reported. Aggregate earnings growth and revenue growth currently stand at 1.4% and 4.5%, respectively. Earnings growth has topped analyst expectations by over 6%, while revenue growth is largely in-line with expectations8.

 

This Week Preview

Flash PMI surveys suggest improvement to manufacturing sector. The majority of the flash Purchasing Managers’ Index (PMI) readings will report on Thursday. The manufacturing readings in Europe and Germany are expected to increase slightly which would mark two consecutive months of improvement. The U.S. is expected to increase to 52.7 and remain above 50, the dividing line between an expansionary and contractionary environment. Mixed readings are expected for each region in the services sector but all are expected to remain comfortably in expansionary territory.

The Federal Reserve releases May meeting minutes. In addition to Federal Reserve Chair Jerome Powell speaking on Monday, the Fed will release meeting minutes from its May 1 meeting. Investors will review the minutes for details that may cast some doubt on Powell’s view that temporary factors are keeping inflation low. Recent inflation readings as well as trade-related risks to the economic outlook have pushed the market expectations of a Fed rate cut by year-end up to 75%9.

Europe and India elections in focus this week. European Parliament elections will take place this week with main topics on voters’ minds including immigration, climate change, labor laws and Brexit. Polls expect the center-left and center-right parties to lose joint control of the legislature10. India’s general election will also conclude this week. Polls widely expect current Prime Minister Narendra Modi to retain his position11.

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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.

End Notes

    1. 1. MSCI U.S. Equities IMI Index returns 13May2019 –17May2019.
    2. 2. Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 17May2019 from https://federalreserve.gov/monetarypolicy/files/monetary20190501a1.pdf
    3. 3. Bloomberg, MSCI Emerging Market Equities Index returns 13May2019 –17May2019. Bloomberg, MSCI U.S. Equities IMI Index returns 13May2019 –17May2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 13May2019 –17May2019.
    4. 4. Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2019 –17May2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 02Jan2019 –17May2019. Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2019 –17May2019.
    5. 5. Bloomberg, MSCI Emerging Market Equities Index returns 13May2019 –17May2019. Bloomberg, MSCI ACWI (All Country World Index) returns 13May2019 –17May2019.
    6. 6. Shuman, Michael. The Atlantic. To China, All’s Fair in Love and Trade Wars. Retrieved on 17May2019 from https://www.theatlantic.com/international/archive/2019/05/china-has-more-leverage-thank-you-think-trade-war/589726/
    7. 7. Perez, Sarah. Tech Crunch. Walmart beats on earnings in Q1, with US e-commerce up by 37%. Retrieved on 17May2019 from https://techcrunch.com/2019/05/16/walmart-beats-on-earnings-in-q1-with-u-s-e-commerce-up-by-37-percent/.
    8. 8. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 17May2019 from http://lipperalpha.financial.thomsonreuters.com
    9. 9. Federal Open Market Committee. (May 1, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 10May2019 from https://www.federalreserve.gov/monetarypolicy/files/monetary20190501a1.pdf
    10. 10. Macdonald, Alastair. Reuters. How the EU will vote and why it matters. Retrieved on 15May2019 from https://reuters.com/article/us-eu-election-explainer/how-the-eu-will-vote-and-why-it-matters-idUSKCN1SL25W
    11. 11. Choudhury, Saheli Roy. CNBC. Exit Polls for the Indian elections are out but they only tell you so much. https://www.cnbc.com/2019/05/20/indian-election-what-exit-polls-tell-us-about-modi-chances.html

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.

Tags: Weekly Market Update

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