Market update (29 May 2018)

Equities finished the prior week slightly higher, by what seemed like a continuous flow of geopolitical headlines. Most of the news focused on U.S.-China trade relations and the U.S.-North Korea summit. The week had begun positive following comments from Treasury Secretary Steven Mnuchin, who said a U.S.-China trade war has been put on hold while the two nations continue to work out their differences along with news that China agreeing to buy more goods from the U.S. in an effort to reduce its trade surplus. By Tuesday China pledged to cut import tariffs on U.S. automobiles and auto parts.

However, markets moved to the downside after news from President Trump revealed that the White House has yet to reach a deal with Beijing to save struggling Chinese telecom company ZTE. The news didn’t sit well with investors, who had been expecting the president to use ZTE as a bargaining chip in trade negotiations. Reports on Friday indicated that President Trump and China have finally reached a tentative deal on ZTE, but by then the focus had largely shifted to the on-going situation in North Korea.

On Thursday President Trump cancelled his June 12 summit with North Korean leader Kim Jong Un, stating in an open letter that he felt the meeting was “inappropriate” based on the “tremendous anger and open hostility” displayed in a recent statement from a North Korean official. However, the president has left open the possibility of meeting with Mr. Kim, saying on Friday that dialog with North Korea has re-opened and that the summit could still happen.

The US administration was also active on the sanctions front. It imposed sanctions on several Iranian and Turkish companies and targeted four Iranian airlines. There were also new sanctions on Venezuela following the re-election of the country’s socialist president, Nicolas Maduro, with the vote widely condemned as fraudulent.

On Wednesday afternoon the FOMC minutes from the May meeting came in more dovish than expected, helping to fuel a late-session rally. The minutes pointed to a rate hike at the June meeting and suggested that the Fed may not be as aggressive with its rate hike path. Officials also suggested they would be content to let inflation briefly run above their 2.0% target.

The UK’s economy grew at the worst rate since 2012 in the first quarter, with GDP up by just 0.1%, according to the second estimate. The Office for National Statistics said it expected a slowing in the growth of consumer-facing industries”.

Bank of England governor Mark Carney warned that weak economic data and Brexit uncertainty might hold back interest rate increases. The dovish tone was increase after an unexpected fall in UK inflation to a 13-month low. Inflation fell for a second consecutive month in April, with annual CPI up 2.4%, down from 2.5% in March.

In addition, the prospect of a populist government coming to power in Italy weighed on Italian markets. A flight to safety pushed both German and U.S. debt higher. Investors also expressed concern over the on-going situation in Spain following Friday reports that the country’s opposition party is looking to oust Prime Minister Rajoy.

Oil prices plunged on news that OPEC and its partners, including Russia, are considering a loosening of their production limits. Both WTI and Brent fell by more than 3 percent Friday morning. Saudi Arabia and Russia are in discussions about raising their production limits, perhaps adding as much as 1 million barrels per day to the market. The group could announce a change in Vienna next month.

The US Department of Justice has reportedly opened an investigation into cryptocurrency price manipulation on crypto exchanges. The investigation is in conjunction with the Commodity Futures Trading Commission, a regulatory body that licensed Bitcoin futures contracts. Criminals have stolen about $1.2bn in cryptocurrencies since the beginning of 2017, according to estimates from the Anti-Phishing Working Group.

This week starts with bank holidays in the US and the UK. Data wise, we have Eurozone and German consumer price index (CPI). UK manufacturing PMI and the first Institute of Supply Management (ISM) reading from the US. US non-farm payroll (NFP) report will be the most important on the economic calendar.