Global Markets Update Tuesday 22 May 2018

Posted on 22 May 2018

US bond yields moved decisively above 3.0% for the first time in seven years, and oil prices breached $80 a barrel.

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United Kingdom

The FTSE 100 gained 0.7% over the week, closing at a record high on Thursday.

Theresa May conceded that the UK will remain in a customs union with the EU after 2021 until an alternative to having a hard border with Ireland can be found. However, the EU remains wary of such an agreement, viewing it as an illicit way of gaining access to the single market.

After two quarters of improvement, UK productivity growth fell by 0.5% during the first quarter of 2018 as hours worked rose without a matching increase in economic growth.

Shares of Ocado jumped 45% after a landmark deal with Kroger, the second biggest food retailer in the US.

US

The S&P 500 slid 0.3% over the week, with higher yielding stocks hurt by rising bond yields. In contrast, the Russell 2000 index of smaller companies closed at a record high.

Headline US retail sales rose by 0.3% in April, while data for March and February readings were revised upwards.

US industrial output rose 0.7% in April, while manufacturing output rose 0.5%.

Europe

The Eurofirst 300 rose 0.6% over the week.

Italian shares fell after the anti-establishment Five Star Movement and far-right League agreed to form a coalition government. Banks were among the weakest performers amid reports that the new coalition planned to tighten the ways in which lenders can recover debt from retail borrowers.

Other rumoured measures included the creation of a mechanism for Italy to leave the euro and demands for the ECB to cancel €250bn of Italian debt, as well as significant fiscal expansion, including the unwinding of recent pension reforms, and a more positive attitude towards Russia. The coalition dropped the first two demands in the final version of their policy document.

The EU announced measures to counteract US sanctions on Iran, in an effort to save the 2015 nuclear deal with Tehran.

Germany’s GDP rose 0.3% in the first quarter of 2018, a significant slowdown from the 0.6% expansion recorded in the final two quarters of 2017. Declining exports were blamed for the slowdown, with German companies becoming increasingly concerned that slower global growth and rising geopolitical tensions would hit export sales.

German industrial prices rose 0.5% in April, taking the increase compared to a year earlier to 2%.

The Zew index of German economic sentiment stalled in April.

Eurozone industrial production rose by a weaker-than-expected 0.5% in March, while February’s data was revised down to a deeper-than-expected fall of 0.9%.

Japan

The Nikkei 225 rose 0.8% over the week.

Japan’s GDP shrank 0.6% on an annualised basis in the first quarter of the year. This is the first time since 2015 that economic growth has contracted and ends the longest unbroken streak of growth since 1989.

Japan’s inflation eased further in April, having dropped for the first time in March since Japan exited deflation in early 2017. Headline inflation rose just 0.6% year on year, down from 1.1% in March, while core core inflation edged down to 0.4%, compared to readings of 0.5% in the previous two months.

Pacific Basin

Chinese officials indicated their willingness to buy more US exports but stopped short of accepting US President Donald Trump’s demand for a $200bn reduction in their bilateral trade surplus.

In China, fixed-asset investment rose a weaker-than-expected 7% year-on-year over the first four months of 2018. Retail sales also disappointed, rising 9.4% on a year-on-year basis in April, compared to 10% in March. However, industrial production beat forecasts, rising 7% year-on-year in April.

Emerging Markets

The Turkish lira hit a fresh record low after President Erdogan vowed to take greater control of monetary policy if he won elections next month.

India’s ruling BNP beat the rival Congress Party in Karnataka – hitherto the state has been the largest to be governed by the Congress Party.

Bonds

The yield on the benchmark 10-year US Treasury climbed above 3.12% for the first time in seven years, boosted by solid retail sales and manufacturing data, but closed the week back below 3.10%.

In the eurozone, the yield on the 10-year German Bund closed the week at 0.58% but the yield on the 10-year Italian government bond hit 2.22%, its highest level since October 2017 and a rise of around 50bps over two weeks. Bonds were hit by rumours that Italy’s new coalition government was considering asking the ECB to forgive €250bn of the country’s debt.

Commodities

Brent crude breached $80 a barrel for the first time since late 2014, the outlook for global supply after the US’s adoption of a harder line on Iran and the economic crisis faced by Venezuela, another oil exporter.

Currencies

Emerging market currencies sank to their lowest level since February 2017 as US bond yields rose well above 3%. The Brazilian central bank cited the weakening of the real as one of the reasons it chose not to ease further, while Indonesia’s central bank raised rates for the first time in four years in a pre-emptive move to deter foreign capital flight.