Greek crisis déjà vu: Geopolitics and trade tensions consumed global markets over the past week triggering a risk-off sentiment and a global flight to safe-haven assets.
U.S.-Chinese Trade Talks: On again, off again – seems to be the best way to describe U.S.-Chinese trade talks. Before last week kicked off, it appeared that the two countries were close to an agreement but as the week progressed and as President Trump expressed his displeasure with the trade talks, continued uncertainty and a threat of a trade war weighed on the markets. Commerce Secretary Wilbur Ross is scheduled to visit China in early June to resume the negotiations.
Separately, the Trump administration launched an investigation on possible tariffs on auto imports into the U.S. on the basis that such imports may pose a threat to national security.
U.S./North Korea: The vulnerable exchange of words between the North Korean Administration and Trump Administration threatened to derail the denuclearization and economic discussions. President Trump announced that the U.S. would be pulling out of the summit scheduled between the two countries scheduled for next month. Cooler heads eventually prevailed as North Korea dispatched one of his top lieutenants, Kim Young Chol, to New York City this week.
Other Geopolitical Stresses: Is Europe in Danger?
Italy: Causing great angst among investors, the debate among Italian politicians on whether Italy should remain in the Eurozone, continued to ignite concerns regarding the country’s burgeoning debt and the stability of the Euro. Italian President Sergio Mattarella’s decision to reject Paolo Savona, a euroskeptic chosen by the Five-Star League to serve as the economic minister, fueled political discord. This decision comes on the back of a deteriorating economic backdrop in Italy, as the Five-Star League introduced their agenda that included: rollback on pension reform, a flat tax, and a minimum salary, all of which could increase the country’s debt burden. Italian bond yields continued their surge as the prospect of a new general election in the fall seems likely. At one point, the two-year Italian government bond yielded 2.67% (level not seen in over five years). Earlier this month the bonds were offering a negative yield.
To give a sense of the volatility within yield, the two-year Italian government bond jumped 35 basis points in one day last week, that is the equivalent of the entire range for the U.S. 10-year treasury for one year, according to the sources.
The contagion effect of Italy’s woes has impacted other European government debt, sparking higher yields for German and Spanish bonds as well. Further, the Euro has dropped to the lowest levels against the USD since July 2017.
Spain: Concerns regarding Spanish Prime Minister Mariano Rajoy receiving illegal kickbacks prompted a special parliamentary no-confidence election this Friday on whether Rajoy will remain in office.
Turkey: In an emergency meeting last week, the Turkish central bank raised its key rate by 300 basis points or 3% as its currency continues to plummet (it has roughly dropped by 20% vs the USD this year and last traded at 4.60 Liras against the dollar), while the country’s inflation continues to balloon near 10.85%. The Lira’s recent decline versus the US dollar has in part been fueled by comments from the Turkish president igniting concern regarding the central bank’s independence from the government. Turkish presidential elections are scheduled for June.
Fed Minutes: FOMC May minutes indicated that the Fed will likely maintain its schedule of rate hikes if the economy continues to perform as expected. The market is widely anticipating a 25 bps rate hike at the June FOMC meeting. Other key takeaways included:
- A general expectation that the Fed’s inflation target will be met in a couple of months.
- An explicit reference was made to the 2% inflation target being asymmetric, suggesting that even if inflation reaches the Feds target, the committee may not necessarily accelerate rate hikes.
- Fed funds could reach the neutral level “before too long”.
- Forward guidance language within the Fed statement may need to be revised as the Fed moves further away from a stimulative growth policy.
- Concerns echoed by officials regarding ongoing trade talks, the related uncertainty and the impact to business sentiment, spending, and inflation.
Separately, the Fed is expected to vote on May 30, on proposed changes to the Volcker Rule (the rule allowed banks to have proprietary trading), which was revoked given the passage of the Dodd-Frank legislation in 2010.
This week:
The U.S. was closed on Monday due to the Memorial Day holiday. All eyes on a few major economic releases including GDP data domestic and abroad, inflation figures domestic and abroad and U.S. May unemployment data released at the end of the week. Investors will be keen to see how the various geopolitical discussions shake-out.
Key U.S. data includes: Case-Shiller home price index, Dallas Fed manufacturing business index (Tuesday), ADP unemployment change (Wednesday), Q1 GDP, Q1 personal consumption expenditures prices, Redbook index, Fed Beige Book, challenger job cuts (Thursday), April personal spending, April Mom/YoY personal consumption expenditures prices, core personal consumption expenditures prices, weekly jobless claims, pending home sales, May unemployment data, May Markit manufacturing PMI, ISM manufacturing PMI, ISM prices paid and total vehicle sales.
Fed officials scheduled to speak include James Bullard (Tuesday) and Raphael Bostic (Thursday).
Overseas data includes: Italian PPI data (Monday), German import price index, JPY unemployment, CAD current account (Tuesday), Swiss trade data, Italian business confidence, JPY retail data, JPY consumer confidence (Wednesday), German retail sales, CHF leading indicators, German CPI, German retail sales, German unemployment, EUR business climate, EUR industrial and consumer confidence, EUR economic/services sentiment, Q1 CAD GDP, CAD central bank decision, GBP consumer confidence, JPY industrial production, CNY manufacturing and non-manufacturing PMI (Thursday), CHF GDP, AUD private sector credit, AUD business confidence, French CPI, GBP mortgage applications, CHF retail sales, Italian unemployment, EUR unemployment, EUR CPI, March CAD GDP, AUD new home sales (Friday), CNY Caixin manufacturing PMI, Italian GDP, EUR May Markit manufacturing PMI, GBP May Markit manufacturing PMI and CAD May Markit manufacturing PMI.
