Market Summary
Asia
With the exception of a mid-week rally last Wednesday, most Asian markets spent the week muted, with investors weighing the potential for an escalating trade war between the U.S. and China and with solid corporate earnings coming from U.S. companies. Chinese shares underperformed as investors both on the mainland and in Hong Kong remain most worried about increased tariffs. For the week the Shanghai Composite had its worst loss in a month as it fell 2.8%, while the Hang Seng in Hong Kong fared somewhat better, losing 1.2%. Japan’s Nikkei had the best performance of the week, gaining 1.8%, with most of that coming in Wednesday’s session. Australia’s S&P/ASX 200 benefitted from firming energy and metals prices, gaining 0.7% for the week, and in South Korea the Kospi moved up by 0.9%.
Asian markets have underperformed fairly consistently over the past month, especially the Chinese market, mostly due to the concerns over trade tariffs. While U.S. investors are now putting that on the back burner and focusing on corporate earnings, the same hasn’t been true across Asia, and that could lead to another tepid week for equities across the Asian region. Australia should see solid gains from metals and energy plays thanks to rising commodity prices, but the continued investigations into banking practices have that sector weighing on market gains. News of soft smart phone sales could continue to hurt the technology sector in the region at the start of the week as well.
Europe
European markets got off to a weak start, improved, but then staggered into the end of the week in volatile trading conditions that led markets to mixed results. Still, the Stoxx Europe 600 was near a seven week high at the end of the week after adding 0.7%. Germany’s DAX managed to pull out a 0.8% weekly gain, even after falling in the final two sessions of the week. In France, the CAC 40 outperformed as it tacked on 1.8% for the week. London’s FTSE finished the week at an eleven week high as it gained in the final four sessions of the week, adding 1.2% for the week after falling as the week began. Investors remain concerned over the U.S./China trade difficulties, but the solid earnings coming from the U.S. were helpful, as was the rally in commodities.
Some of the week’s gains were no doubt due to the firming U.S. dollar, and in the case of the FTSE – the softness of the Pound. If this dynamic continues in the coming week we should get more gains from markets, especially if corporate earnings and commodities remain strong. This is actually a perfect environment for the FTSE in London, and we’ll be looking for that index to outperform in the coming week as investor expectations for a May interest rate hike continue falling. Germany’s DAX struggled in the past week, but should begin to recover in light of the good corporate earnings we’ve been seeing from the U.S.
US
U.S. markets got the week off to a good start, with investors enthused with recent corporate earnings, although financial shares saw heavy selling despite beating profit projections as investors were focused on taking profits after the news. By the end of the week markets were faltering, however, with rising interest rates weighing on equity performance. Friday saw a broad-based selloff that erased nearly all the week’s gains for the major indices as the Nasdaq advanced 0.6% for the week, while the S&P 500 was 0.5% higher and the Dow Industrials gained 0.4%. It was the second weekly advance for the major indices, but all three ended the week below their 50-day moving averages, indicating short term momentum is possibly turning downwards.
One bright spot for equities in the coming week might be corporate earnings, which have been quite good so far. Markets face a hurdle in the form of interest rates, however, with the U.S. ten-year Treasury bond currently near a four-year high yield of 2.96%. There is a feeling that bond yields above 3% will make bonds far more attractive than equities, and rising yields could lead to a serious downdraft for equity markets.
Gold/Crude Oil
Gold bounced back and forth in a tight range for most of the week, but then fell hard on Friday and posted a weekly loss for the first time in three weeks as it was down 0.7% on a weekly basis. The weakness came in response to a rallying U.S. dollar, with the greenback hitting a two-week high on Friday. There is a good chance that the USD will continue its upward momentum in the coming week as it appears traders are finally beginning to price in another three interest rate hikes this year. Further strength for the USD could see gold coming down to test the $1,300 level.
Crude managed to gain for the week, but it was a more mixed trading picture now that crude is trading above $70 a barrel. There seemed to be some consolidation, but there was also support in the form of a surprise drop in U.S. crude inventories, and indications that OPEC is willing to expand production cuts. That aside, Friday saw President Trump tweeting that crude prices are “artificially high” due to OPEC intervention. Crude initially fell on the tweet, but recovered by the end of the session to close slightly higher and post a 1.5% weekly gain.
More gains for crude at these levels could be difficult as it seems there’s little more good news that could come along to send crude prices higher. In fact it is far more likely that the market will get bad news at this juncture, so we’d be cautious with crude at these levels. A large increase in U.S. inventories or a spike in U.S. production could both send crude crashing lower in the coming week.