World markets retreated this week as escalated tensions in the US-China trade relationship, discouraging economic reports and warnings from policymakers weighed on risk sentiment. Investors monitored the progress of re-openings of frozen economies and the plethora of global fiscal and monetary policy relief efforts whose lifelong legacy of debt could sow seeds for future crises.
US equities erased most of the prior week's gains with the S&P 500 coming under selling pressure. Worries of a resumption in the U.S.- China trade war hampered sentiment after the White House moved to block global chipmaker companies from supplying Chinese telecom giant Huawei Technologies Co. Ltd.
Meanwhile, the Federal Retirement Thrift Investment Board (FRTIB) charged with overseeing billions in federal retirement dollars announced it would indefinitely delay plans to invest in Chinese stocks. Sentiment also appeared to take a blow following Federal Reserve chair Jerome Powell's comments. Powell warned that the damage from the pandemic could have a lasting effect on the US economy. He also excluded any negative interest rate moves.
Adding to the market gloom, bleak economic data continued to hit the tape. Thursday’s weekly jobless report showed 2.98 million more Americans filed for benefits in the previous week. Roughly 36 million people, or 20% of the US workforce, have now filed for jobless aid in eight weeks. The Commerce Department also reported that excluding sales by motor vehicle and parts dealers, retail sales plunged by 17.2% in April, the biggest fall on record.
The Mexican market weakened amid concerns that the US could experience protracted economic downturn. The Bank of Mexico decided to cut its monetary policy rate from 6.00% to 5.50%, as widely expected. In Brazil, where the second Brazilian health minister resigned in a month, the Senate is studying several drafts bills to increase tax for the banking and mining sectors.
Following our communication with Venezuela-based Prof. Samuel Torres, he mentioned that emerging markets in Latin America are influenced by the US macroeconomic context, the White House and the center of the New York market, plus the impact of the pandemic. He also added that Caracas stock exchange IBC Index closed up 1.47% at 62,022.46 points on Friday (May 15). Among the best performers were Fondo De Valores Inmobiliarios (FVI.B)+ 7.69%, Telares de Palo Grande (TPG)+7, 50%
and Banco Provincial (BPV) + 5.77%.
Japanese stocks posted mixed returns for the week. On a positive note, Japan lifted its state of emergency in 39 out of its 47 prefectures on Thursday, improving investors' sentiment. But data showing 89 companies filed for bankruptcy in April dampened reopening optimism. Most of the filings were small and medium-sized companies, according to a Tokyo Shoko Research survey, with analysts expecting the total will continue to rise. Meanwhile, a key economic indicator which consists of a range of data including factory output, employment and retail sales fell at the fastest pace since 2011 in March and the government warned of a deep recession.
In China, Mainland A-shares were able to hold steady until midweek, before weakening on resurfacing U.S./China tension. A batch of better than-expected April economic data also kept investors in a buying mood. China's industrial production rose 3.9% year on year, bolstered by April's stronger-than-expected exports. Stocks were also supported by promises of additional fiscal stimulus from Finance Minister Liu Kun.
In India, the stock market sagged for the week but received a midweek boost after Prime Minister Narendra Modi announced a Rs20tr fiscal package (10% of GDP) to boost the economy.
Australia's market managed a small gain. In New Zealand, the central bank (RBNZ) left its official cash rate (OCR) at 0.25%, as widely expected. The surprising elements were the RBNZ’s willingness to use additional tools “if and when needed” including further cuts and expanding its quantitative easing programme, as the Covid-19 wreaks havoc on the economy.
European equities fell as Brexit began to make headlines again and the vagueness of Europe’s stimulus plan is still weighing on the eurozone. UK and EU negotiators suggested trade talks remain completely deadlocked. That raised the risk that the UK’s transition period would end on 31 December 2020 without a free-trade deal, further straining the region’s economy. The trade deal would affect EU-UK trade, which accounts for 49% of international UK trade.
The Bank of England (BoE) now expects the UK economy to contract by 14% this year. BoE Governor Andrew Bailey said that the markets’ basic assumption is that Threadneedle Street will support massive fiscal stimulus. He also reaffirmed that negative rates is not on the table at the moment.
Fears of a prolonged recession continued to mount. GDP decreased by 3.8% in the eurozone and by 3.3% in the EU during the first quarter of 2020, compared with the previous quarter, according to a flash estimate published by Eurostat. These were the sharpest declines observed since time series started in 1995.
France's GDP withered 5.8%, the worst result among the 19 out of 27 EU member countries which together constitute the Eurozone, followed by Slovakia (5.4%) and Spain (5.2%). Italy’s economy shrunk by 4.7%.
Speaking of Italy, the Italian government approved a €55 billion economic stimulus package, which includes tax breaks and grants for businesses and households and incentives to back the tourism sector.
Meanwhile French Prime Minister Edouard Philippe announced a €18 billion scheme for the country's hard-hit tourist industry.
Eurozone's GDP is expected to plunge by between 5% and 12% in fiscal 2020 largely impacted by the coronavirus pandemic, the European Central Bank (ECB) said in its economic bulletin on Thursday.
Equity investors took a glass-half-empty view of the world and analysts reduced their expectations for company earnings in the second and third quarters as fears of a prolonged recession due to the coronavirus continue to grow.
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What's ahead next week:
Wholesale trade sales
Consumer Price Index
Markit Purchasing Managers Indices
Conference Board Leading Index
Existing home sales
Industrial production and capacity utilization
Zew Economic Sentiment Survey
The content of this review is for informational purposes only and should not be interpreted as specific investment advice.