Investment Viewpoint: a welcome sense of calm

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Markets and macro insights with Sebastian Orsi CFA, Senior Research Analyst

How did financial markets perform last week?

• Global markets were relatively calm last week, a welcome change from recent volatility. Global equities were flat in local currency terms. A slight weakening of the euro means that global equities were up 0.7% in euro terms. The US S&P 500 was slightly weaker last week, down 0.4% in local currency terms. More cyclical sectors, such as Industrials and Financials, have performed best, along with Information Technology. Health Care and Utilities have proved to be the weakest sectors.

• US and European bond yields were initially slightly lower; however, US yields ticked a few basis points higher, while European yields remained largely unchanged. These developments were spurred by the relatively positive news on global trade arrangements, as well as by macroeconomic releases and company earnings reports.

What were the most important influences on market performance?

• The US and China agreed to meet to discuss de-escalation of the trade dispute. The US and UK announced a trade agreement, with the US moving to cut its tariff rates on UK automobiles, aluminium and steel. Details are yet to be confirmed, but markets welcomed the news. Markets were more focused on US-China relations given that these two countries are such significant trading partners. Press reports indicated that the US is considering reducing the tariff rates applied to Chinese goods, and this seemed to receive confirmation from President Trump.

• In addition, Q1 earnings season is wrapping up: about 90% of the S&P 500 companies have reported, and the results are positive. A higher-than-average proportion of companies have exceeded expectations, and EPS growth has accelerated to over 13%. In Europe, 60% of companies have reported with results about 6% ahead of consensus expectations, although still showing -5% EPS growth. However, all commentary on outlook must now be qualified by a sense of general uncertainty.

What were the main recent economic developments?

• The Services PMI releases were the main data releases. The US and European indices came in higher than anticipated and were up compared to last month, a positive macro indicator. China’s Caixin Service PMI was down relative to expectations—and incomparison to last month—but was still in expansion territory.

• The US Federal Reserve kept policy rates unchanged but highlighted its concern that the US administration’s policies will have negative implications for its dual mandate, bringing both higher inflation and unemployment. In his prepared comments, Chair Powell noted that policy uncertainty is high, but that the economy has been in good shape. Longer-term inflation expectations remain consistent with the Fed’s 2% target. Therefore, more clarity is needed before any rate change.

Where do the current developments leave markets so far this year?

• In local currency terms, regional equity markets have all recovered from the selloff prompted by ‘Liberation Day’ in April. Global equities are down ever so slightly year to date, -0.6% in local currency terms. The S&P 500 is down only 3.3%. Currency value has had a big impact for euro-based investors. Global equities are down 6.5% year to date in euro terms, due to the euro’s strength; the S&P 500 is down 11%.

The week ahead: what to watch out for

US inflation figures, both CPI (Consumer Price Index) and PPI (Producer Price Index) are due this week, on Tuesday and Thursday respectively. CPI is forecast at 2.5% y/y, up slightly from 2.4% last month. Core CPI (ex-Food & Energy) is forecast at 2.9%, up from 2.8% last month. Of course, these data points are somewhat less relevant as they predate the imposition of tariffs. Tariffs are expected to drive inflation higher. The question is whether this increase will represent a once-off change in price levels, or whether it will drive a persistent inflation trend, as well as higher medium-term inflation expectations.