Markets & Key Events
18th May 2018
Rising US interest rate expectations leads to a mixed week in markets
It was a mixed week for markets as expectations rose for a more hawkish United States Federal Reserve after robust retail sales data was released for April. The US dollar resumed its recent upward trend versus a basket of internationally traded currencies. US government Treasury bonds sold off, with the 10-year yield hitting an intraday peak on Friday of 3.128%, its highest level since July 2011 (yields move inversely to price).
Emerging markets under pressure, whilst European and Japanese markets benefit
Emerging markets came under pressure from the rising US dollar, with the MSCI Emerging Markets index falling 1.8% over the week (up to Friday, 12pm London time), as countries reliant on international funding saw their debt servicing costs increase. The US Standard & Poor’s 500 Index fell 0.3% with those sectors perceived to be bond proxies: utilities, telecoms and property; the worst hit sectors. The EuroStoxx 600 index and the UK’s FTSE All Share both benefitted from currency weakness, rising 0.6% and 0.7% respectively over the week, as those companies deriving a significant proportion of their revenues from overseas become more competitive, generating higher profits, as their revenues are translated back into a weaker Euro or Sterling. Similarly, the Japanese Topix index rose 1.1% as the Japanese Yen weakened against most other major currencies.
Chinese ‘A’ shares manage to shine
Despite most emerging market equity markets falling over the week, the Chinese Shanghai Composite index rose 1.0%, helped by President Trump reversing sanctions on ZTE Corp, a Chinese telecoms group, which fell foul of US authorities for having sold equipment to Iran and North Korea.
Australian equities dragged down by Materials, despite strength in Energy
The Australian S&P/ASX 200 index is down marginally by 0.5%, ending a six-week run of gains. The energy sector led the market this week as oil prices continued to rise; the S&P/ASX 200 Energy index gained approximately 2% over the period. However, this positive contribution was offset by Friday, after weakness in the Financials, Materials and Telecom sectors. In economic news, on Thursday, the April employment figures were released, with the economy adding 22,600 jobs, ahead of analysts’ expectations of 20,000. The positive news led the Australian dollar higher at USD $0.7543 however, by the end of the week the Aussie dollar finished trading at USD $0.7518.
Gold hurt by rising interest rate expectations
Gold fell over the week, now trading at $1,286, its lowest level since late December 2017, hurt by rising expectations for US interest rates. Gold tends to perform well as a store of value either during times of market turbulence, or as a hedge against inflation if real yields (interest rates less inflation) are expected to stay negative. When expectations are rising for US interest rates, gold generally suffers.
Brent crude oil breaks through $80 a barrel
Brent crude oil climbed to over $80 a barrel on Thursday, with expectations growing for supply cuts from both Iran and Venezuela. Iran’s supply is expected to fall as a result of the US announcement to reimpose sanctions, whilst Venezuela is suffering from a collapse in crude oil exports. The national Venezuelan oil company, PDVSA, is battling with default over unpaid bonds, with creditors threatening to seize overseas assets. Some commentators are suggesting that should Iranian and Venezuelan oil supply fall in tandem, this could provide the perfect environment for oil to return to $100 a barrel. Brent crude is currently trading at $79.6, whilst US WTI (West Texas Intermediate) is trading at $71.6 a barrel.