Stocks recorded solid gains and reversed the previous week’s losses. Markets remained volatile, however, as investors appeared to remain focused on the turbulent political environment rather than the upcoming release of first-quarter corporate earnings reports. The Nasdaq Composite Index performed best, helped by a rally in Facebook shares as investors seemed to react favorably to Facebook CEO Mark Zuckerberg’s testimony before Congress on Tuesday and Wednesday. While tech shares performed well, energy stocks led the gains in the S&P 500 Index, helped by a rally in crude prices to their highest level since late 2014.

Syria Fears Grow

Concerns over growing trade tensions with China continued to weigh on sentiment, although investors appeared to grow more optimistic that a full-scale trade war involving the world’s two largest economies would be averted. Chinese President Xi Jinping provided another boost to sentiment later in the week after he repeated a vow to ease access to sectors ranging from banking to auto manufacturing and to protect intellectual property in a “new phase of opening up.”

Even as the trade backdrop brightened a bit, new geopolitical clouds darkened the horizon. Stocks fell sharply in early trading Tuesday, following a tweet from President Trump threatening a missile strike on Syria in response to the Assad regime’s alleged chemical attack on dissident areas the previous weekend. Investors also appeared to be unsettled by tweets from the President attacking the Mueller investigation following the FBI’s seizure of documents from his personal attorney, Michael Cohen. Stocks rallied on Thursday after the President appeared to calm tensions on both fronts, tweeting that a Syria strike might not be imminent and that he would have already fired Mueller if he were planning such an action. Finally, reports surfaced on Thursday that the President was considering having the U.S. re-enter the Trans-Pacific Partnership, a multilateral trade agreement that could offer lower trade barriers to U.S. exporters.

Europe

With geopolitical tensions in focus, European stock markets ended the week higher as the start of earnings season and positive economic news countered some investor reluctance about the attractiveness of equity markets. As in the U.S., investor concern about the prospects of a trade war or the ramifications of a military confrontation centered on Syria seemed to ebb as the week progressed.

The European STOXX 600 Index advanced around 1% for the week. Germany’s exporter-heavy DAX 30 also rose for the week, despite news that the country’s exports plunged in February, largely due to a strengthening euro. German markets were supported by news that consumer price inflation accelerated in March, and they were also lifted by a report that China’s imports increased in the latest period. The UK blue-chip benchmark, the FTSE 100 Index, rose about 1%, but the index has been underperforming its European counterparts largely due to the strong pound, which weighs on the companies that convert non-UK profits back into the sterling. News of a decline in factory output did not seem to unsettle investors. Benchmark indexes in Spain, France, and Italy also ended the week higher.

According to its policy minutes published this week, the European Central Bank (ECB) pointed out that a strengthening euro and an increased risk of a global trade war could detract from the economic recovery currently underway in the eurozone. Following the ECB’s warning, European markets were somewhat volatile as investors weighed the impact.

Japan

Haruhiko Kuroda recently started his second five-year term as the Bank of Japan’s (BoJ) governor. Kuroda’s goal when he was first appointed in March 2013 was to snuff out deflation and to achieve an annual inflation rate of 2% in two years. In what became known as the “Kuroda Bazooka,” Kuroda implemented an aggressive quantitative easing program on a much larger scale than anyone had anticipated. Deflation has been vanquished, and while the 2% inflation goal has been elusive, Japan’s economy has flourished. Gross domestic product has expanded for eight consecutive quarters through December 2017, corporate earnings are booming (setting record highs in each of the past two years), and unemployment touched a 24-year low. The central bank’s easy money policies weakened the yen and spurred stock prices to multiyear highs.

At a news conference following his reappointment, Kuroda said, “There is still some distance to achieving the inflation target,” which confirmed for the markets that there would be no change in the central bank’s monetary policy stance in the near term. It seems that that was the desired goal because Kuroda may be concerned that interest rates could spike if the markets suspected an end to the current policy stance. The yen strengthened in 2017 and has continued its ascent in 2018, which poses a risk for the economy. Investors are also worried about the protectionist policies of U.S. President Donald Trump, as well as the threat of trade wars. These concerns showed up in the latest Tankan survey, which revealed that large manufacturers’ sentiment turned lower for the first time in about two years—possibly a sign that economic growth is peaking after the longest period of expansion in three decades.

All the best

Stuart

CEO

Farringdon Group

+60 3 2026 0286

The first quarter of 2018 has been one of the most challenging quarters for global asset markets since the 2008 Financial crisis. However, despite falling asset values in most developed and developing markets the global economic picture remains healthy with robust growth figures being reported worldwide.

North America

After a substantial rally in 2017, US stocks have dropped by 10% since their highs on the 26^th of January; the Dow jones is down by 2,684 points. However, much of this drop can be explained by simple profit taking from last year’s bull market which was the biggest since 1987.  Bonds have also continued to underperform in the US on concerns that the US economy is overheating, and higher inflation will lead to higher rates.

Ultimately, we see the events of Quarter 1 as a positive; there was no doubt that the market had risen too much and a moderate contraction in asset prices will likely serve to release dangerous pressure from the market. The underlying economic picture remains healthy with record high employment levels. There may be a need to consider selling down in 2019 but for now, moving away from tech stocks and towards more traditional companies and shorter-dated bonds would seem to be enough of a defensive play.

Trump’s looming trade war with China may also cause concern, however we feel that it is likely to be a short spat between China and the USA which will ultimately dissipate with only minor economic impact.

UK

UK stocks have finished an abysmal year with the FTSE 100 dropping by 9% since a brief high on the 12^th of January. This has been caused by concerns over future Brexit deal, a rising pound and concerns over future interest rate rises affecting high-quality assets. At today’s prices FTSE 100 stocks are at the same levels they were at May 2015, nearly 3 years ago.

However, with the political capital gained by the UK over the poisoning of an ex-Russian spy it seems a decent Brexit deal is increasingly possible. While we expect to see the pound rising further we may also see an uplift in key resource and financial companies that make up much of the FTSE 100.

Europe

As growth continues to slow and Europe continues to experience the rise of alternative political parties we expect to see European assets and the Euro under-perform.

Emerging Markets

The contraction in offshore US dollar liquidity will continue to pose a threat to emerging markets, especially those linked to China and Hong Kong. However, global growth remains strong and we expect to see broad-spread EM assets perform well.

All the best

Stuart

CEO

Farringdon Group

+60 3 2026 0286

Trade Tensions Continue to Influence Markets

The major benchmarks ended lower after another week of significant volatility. Heightened trade tensions between China and the US continued to dominate sentiment during the week. Stocks sold off sharply on Monday, following China’s announcement that it would retaliate on US aluminum and steel tariffs with $3 billion in new tariffs of its own, targeting roughly 130 U.S. products and concentrated on agricultural exports. On Tuesday, the US further upped the ante, outlining a list of $50 billion in proposed tariffs on 1,300 Chinese products, and China responded on Wednesday with its own $50 billion list of tariffs on US soybeans, cars, and aircraft.

Investor patience reached a breaking point on Thursday evening after President Trump raised the stakes even further by ordering the consideration of an additional $100 billion in tariffs on Chinese goods. Stocks futures fell in response, and on Friday morning, Chinese officials struck back—a notable departure from their delayed and guarded response to earlier U.S. tariff announcements. Commerce Ministry spokesman Gao Feng threatened a “fierce counter strike” and stated that negotiations were unlikely in the current environment. US stocks appeared to fall further in response.

Another factor that may have weighed on sentiment Friday was the Labor Department’s monthly employment summary, which showed a much smaller rise in payrolls than expected (103,000) and revised lower the previous months’ gains.

European Stocks End the Week Higher

European stocks weathered a volatile week as trade hostilities between the US and China prompted investor sentiment to dampen. The pan-European STOXX 600 Index ended the week higher due to a rally on Thursday that produced the biggest one-day percentage gain in nearly two years. The economic recovery in Europe continued to strengthen, according to some measures. Unemployment in the 19 countries that use the euro fell to its lowest level since December 2008, according to Eurostat. But inflation remains well below the European Central Bank’s target of just under 2%. Wage growth was also lackluster. Weak domestic demand caused German industrial production to fall 1.6% in February versus expectations that it would rise 0.2%.

Japanese Stocks Still down for the Year

Japanese stocks posted a modest gain for the week, with the Nikkei 225 Stock Average returning 0.53%. However, all the major Japanese market indexes remain substantially in the red for the year to date. The Nikkei is off 5.3%, the broad-based TOPIX Index is down 5.4%, and the TOPIX Small Index has declined 4.2%. The yen weakened slightly and traded on Friday at ¥107.11 per US dollar, which is about 5% stronger than the ¥112.7 per dollar level at the end of 2017.

Elsewhere in Markets

Brazil’s stocks rallied after Brazil’s Supreme Court refused Luiz Inacio Lula da Silva’s appeal of his corruption conviction and ordered him jailed. The move will effectively eliminate him as a contender in the country’s October presidential election.

The central bank of Brazil, which only recently emerged from recession, eased reserve requirements for the banking sector one week after it reduced its key lending rate to a record low in an effort to boost liquidity and ultimately spur growth and it should make Brazilian banks more stable. Brazilian banks had previously faced some of the highest loan-to-deposit ratios in the region, over 150% on average, but they have already turned to other funding sources. The cut in reserves will, at most, shift the funding mix toward more deposits, but the impact on actual loan origination growth will be primarily driven by the banks’ risk appetite and expected return on risk-weighted assets. Ultimately, the cut in reserve requirements eliminates a historical distortion and is good for funding stability, as deposits will become a greater percentage of the total bank funding. However, Yago doubts the change will have a meaningful impact on lending policies.

All the best

Stuart

CEO

Farringdon Group

+60 3 2026 0286