Insight Multi-Asset weekly update: Equities markets weaken on trade and poorer growth data
Market and economic review
Equities and government bond yields fell again last week on data suggesting a poor growth outlook and increasing trade war tensions
Continued escalation of trade tensions and poor provisional PMI data points led equities to close lower after a choppy week. The core government bond complex saw yields move lower, with 10-year US Treasury yields 7 basis points lower over the week, at a two-year low. Currency markets also saw a risk-off bias, with strength in the Japanese yen and Swiss franc. The US dollar looked set to continue strengthening; however, momentum faded following poor PMI data. Sterling continued its fall amid a deteriorating Brexit outlook, with a leadership reshuffle now to contend. Further afield, the emerging market complex continued to underperform developed market last week, given higher sensitivities to trade war rhetoric and global growth outlook.
Provisional PMI prints out of US, Europe and Japan point to weaker growth
Thursday was the key day for economic data, with provisional PMIs out of Japan, Eurozone and US, alongside German IFO survey and US durable goods. The US manufacturing PMI was sharply lower, with a reading of 50.6 in May vs 52.6 in April, a nine-and-a-half-year low, services (50.9 vs 53) and composite (50.9 vs 53) also followed suit. The Japanese manufacturing PMI fell to 49.6 vs 50.2 last month with German, French and Eurozone PMI prints mirroring continued weakness. While the divergence of service strength and manufacturing weakness remains, the more concerning question raised was if weakness was spreading to services PMIs. It is also important to note that the recent escalation of trade tensions will only have been reflected in the expectations component of the PMIs (rather than output data yet). Looking to Japanese manufacturing PMI comments, it was highlighted that sentiment turned negative in May, for the first time in six and a half years, on US-China trade tensions. Thursday saw subsequent sharp market moves across risk assets. Other data from the week saw German IFO headline business climate index slip to 97.9 from 99.2 in April. Meanwhile, US durable goods orders also fell in April to -2.1%, slightly below expectations of -2%.
Trade tensions continue to escalate between US and China as the US blacklists leading Chinese tech firm
Following the developments between the US and China, steps have been made by the US to make trading more difficult for Chinese tech firms (namely, Huawei). They have subsequently granted a 90-day grace period on the ban. This theme looks likely to intensify with speculation of five more Chinese firms are to be added to the blacklist. This move is also impacting European and Japanese firms involved in the supply chain to Chinese firms. Chinese media has drawn attention to China’s exports of key raw resources and components to the US, amid a lack of an official response from China on the blacklisting. Broader questions remain around what other cards China can play in this dispute. Whether this is posturing or not, the underlying message outlined by the Chinese Commerce Ministry spokesperson was: “If the United States wants to continue trade talks, they should show sincerity and correct their wrong actions”.
The probability of a hard Brexit rises, with UK Prime Minister Theresa May set to resign on 7 June
UK Prime Minister Theresa May was unable to push through her final bid for a deal, with sterling briefly rallying on her last ditch attempts to make concessions with a subsequent fall when it was clear she had been unsuccessful in swaying the required MPs. She announced her resignation on Friday with a departure data set for 7 June, the new race for leadership will take place week commencing 10 June, where the front-runner at the time of writing is pro-Brexit campaigner Boris Johnson. While the UK’s Brexit divorce outcome has never been clear, there has always been some middle ground of softer terms or less harsh implications. With the next phase of leadership, the probability of a soft Brexit decreases, and the increasing likelihood of a Brexit hardliner or a Corbyn government continue to push sterling lower.
More constructive political developments
India saw a landslide win for the incumbent BJP (Indian People’s Party), led by Narendra Modi. This bodes well for Indian assets, with the ability to maintain policy stability and continue reforms; the market has been quick to price this with the Indian equities up 3.8% over the week. Australia also saw a victory for the incumbent with the Liberal-National coalition securing a third term. Australian equities were also up sharply, with financial services and consumer stocks leading, given the prospects of income tax cuts and the Labour plans to scale back investor incentives now dead.
Outlook
Given the weakness in PMIs last week, the key focus will be on Friday when China releases its manufacturing PMIs. We are likely to see a similar impact of trade on the forward looking components of the series.
In the week ahead, trade tensions will remain in focus; however, the political ramifications of the UK Prime Minister’s departure and the results of the EU parliamentary elections on Sunday are likely to take centre stage. At the beginning of the week, EU trade ministers meet in Brussels to discuss the threat of US auto tariffs; however, this is less of an event given the recent de-escalation of US-EU tensions. The US and UK markets will be shut on Monday, with various confidence readings, surveys and CPI figures released across the week. In terms of other notable releases, we will get the second reading of Q1 GDP for US on Thursday.
By Adam Kibble, Investment Specialist
