Weekly markets insight report
May 8th 2018

Equities:

As last week ended Wall Street managed to recover from an uncertain start. Stock traders had to absorb the April employment report that showed job creation was less than had been expected although unemployment fell, and wage growth was steady.

Within the S&P 500 all 11 sectors moved higher led by technology, materials, consumer staples and consumer cyclicals.

In Europe the French Bank Soc Gen declined on a 2.8% fall in Q1 revenues which were fettered by a decline of 56.9% in investment banking revenues.

In the UK, Diageo gained as Citigroup issued a BUY notice and data on US spirits sales showed the firm seeing growth in Tequila and Vodka beating the overall market for a third consecutive month. BHP Billiton was the leading UK listed mining stock as the groups greater diversity favoured a move to BHP from Rio Tinto.

HSBC lagged for similar reasons to Soc Gen. The UK/Asian bank endured weaker Q1 earnings and increasing operating costs led to soft levels of cash generation.

Fixed Income:

The yield on the 10-Year German Bund slipped 3 bps over the week to 0.46%. This pattern has continued on Monday as Eurozone government bond yields dipped as an unexpected fall in German industrial orders served as a reminder that a softening in economic data will encourage the European Central Bank to prolong an unwinding of stimulus.

The strength in bond markets suggests investors are not convinced that inflation will hit the ECB’s 2% target anytime soon.

Italy remained in focus after the leader of Italy’s anti-establishment 5-Star Movement said on Monday his party would not back any stop-gap, technocrat government put together to end two months of political deadlock.

Luigi Di Maio said if it is not possible to put together a government based on a political deal between 5-Star and the far-right League then a repeat election should be held.

One clear worry in fixed income is whether another Emerging Market debt crisis is about to bite as the Dollar moves higher. In Argentina the central bank had to announce three separate increases in its central rate. These were finally settled at 40% as Peso outflows began to slow. Of course, Argentina has several specific problems as it attempts to manage its way out of the shambolic economic legacy left by the two Presidents Kirchner. Most Emerging Markets Bond indices have fallen back to levels last seen in November 2016. Therefore, be braced for a summer if discontent in bonds issued by Brazil and Mexico.

Foreign Exchange:

The Dollar Index made gains above 92 and has been testing fresh 2018 highs. In currency pairs, GBP/USD inched up 0.05% to 1.3538 with UK traders celebrating a holiday on Monday.

Meanwhile, the Euro continued to be under pressure, as investors continued to weigh signs that the euro zone economy was losing momentum. Among reports released on Monday, German factory orders registered a surprise decline of 0.9%.

The Eurozone purchasing managers index (PMI) for the retail sector slipped into contraction, with the sharpest decline in annual sales in the last 13 months.

Commodities:

Metals:

Gold held on to its weaker tone through the mid-European session and is currently placed at the lower end of its daily trading range, around $1312 level.

The precious metal initially built on last week’s recovery move from the very important 200-day SMA and touched a one-week high near the $1319 region. However, a strong follow-through US Dollar buying interest prompted some fresh selling around dollar-denominated commodities – like gold.

Oil:

U.S. oil prices rose above $70 a barrel on Monday for the first time since November 2014 and Brent crude climbed to fresh highs, on a deepening economic and social crisis in Venezuela and a looming decision on whether the United States will re-impose sanctions on Iran.

Oil prices often put upward pressure on bond yields given their implications for higher inflation.

Economic Calendar, all times are BST:

When/Nation Data Point/Event

Expect Prior

Tuesday 8^th:

0815 USA  Fed Chair, Jerome Powell Speaks

1500  USA Jolts Job Openings (MAR) 6.101M 6.052M

Wednesday 9^th: 

1330 USA PPI MoM (APR) 0.2% 0.2%

1530 USA  Crude Oil Inventories 4.257M 6.218M

Thursday 10^th: 

0930 UK Manufacturing Production MoM (MAR) -0.2%  -0.2%

1200  UK  BOE Inflation Report

1200 UK BOE Interest Rate Decision 0.5% 0.50%

1330  USA Core CPI MoM (APR) 0.2%  0.2%

Friday 11^th:

1415  EZ  ECB President Mario Draghi Speaks