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Week 14 2018 In Review

 

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

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