US equities stand out from the global pack, basking in the afterglow of tax reform and a stronger domestic economy that may be enough to shield Wall Street from the worst of the escalating trade protectionism. The long-awaited tariffs worth $34 BN on Chinese imports came into force last week.
In volatile 2018 markets, the US S&P 500 stands 2 per cent higher for the year, which looks a lot better when compared with other global equity markets: The Euro Stoxx 600 is down around 2%.
One distinguishing factor behind Wall Street and Europe has been the strong performance of large US technology companies, while trade tension and negative official borrowing rates have hurt Eurozone exporters and financial firms. The US domestic economy seems on a stronger footing than the rest of the world.
Investors having been pulling cash from funds invested in European and Emerging Market equities equating to the longest streak (17 weeks) of withdrawals since 2016:
- Cash is coming out of Europe not just because of uncertainty about the Eurozone economy, not helped by ‘trade war’ talk, but also as uncertainty grows about the fate of the Eurozone in the wake of Italian political upheaval.
- Cash is coming out of Emerging Markets due similarly to trade war and global economic growth concerns but also due to the strong US Dollar over the last few months. Many Emerging Market countries borrow heavily in US Dollars ($ denominated bonds): As the ‘Greenback’ strengthens so the cost of servicing that debt in local currency terms grows.
As global bond yields started to rise in January many called the “end of the 30-year bull market in bonds” (remember yields up means prices down). However, with 2018 equity market volatility and considerable geopolitical uncertainty, investors seek ‘safe haven’ investments at such times; that means buying bonds.
So the rise in bond yields this year has been muted i.e. the 10-year US Treasury bond yield has only risen from 2.50% Yield-to-Maturity to 2.83% YTM – hardly a ‘bear’ market.
- The Dollar strength over the last few months is due
- A continued and gradual rise in US interest rates
- A relatively robust US economy
- Political uncertainty in Europe
The British Pound is also relatively weak in the light of this Dollar strength not helped by continued uncertainty over Brexit. GBP/USD is £1.3100 down from £1.4300 a few months ago.
- Oil remains well supported at $75 per barrel on
- Continued tension in the Middle East
The successful 18 month cut in production agreed between OPEC (led by Saudi Arabia) and Russia with both entities now beginning to add oil such supply back into the market. Oil recently achieved a 4-year high above $80 per barrel.
S&P 500: 2723
FTSE 100: 7550
Bonds – 10 Year Government Yields
EUR/USD 1.1700 (1 euro buys 1.1700 dollars)
GBP/USD 1.3100 (1 pound buys 1.3100 dollars)
OIL: Brent: 75.00 (dollars per barrel)
GOLD: 1265 (dollars per ounce)
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