Week from 20 to 26 May 2019
Investors should have given credence to this adage as equity indices were on track to post their worst monthly decline since the Q4 2018 sell-off (S&P500 down 1.17% WTD, -4.07% MTD, MSCI EMU down 2.16% WTD, -5.08% MTD, Shanghai Composite down 1.02% WTD, -7.33% MTD). After Huawei was added to the Trump administration’s trade blacklist last week, a number of companies (including Apple, Google, Microsoft, Intel, ARM, etc) decided to follow suit and limit or suspend services to the Chinese telecom giant, deepening the trade dispute between the U.S. and China.
To make matters worse, the latest news on the macro front was not good: even if a recession is not likely to start in the near future, a range of key indicators show that output is slowing. Hence there is growing uncertainty for the next quarters.
Thus, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index (at 50.9 in May vs. 53.0 in April) indicated the slowest expansion in overall business activity since May 2016 while new home sales fell 6.9% in April, well below the consensus forecast of 2.8%. This data came on the back of similarly weak business surveys in Japan (manufacturing PMI dropping from 50.2 in April to 49.6 in May) and Europe (Germany’s manufacturing PMI at 44.3 in May, compared to 44.4 in April).
Against this gloomy backdrop, oil prices plunged more than 6.5% (WTI) over the week though they stabilized on Friday amid OPEC supply cuts and tensions in the Middle East, leaving the energy index down 3.48% WTD, the biggest decline among the major 11 S&P sectors. Consumer discretionnary (down -2.22% WTD), communication services (-2.1%) also lost ground as well as information technology (-1.86%) logically hit by Huawei fallout. Even more striking is the underperformance of GAFAM stocks: Apple (-5.31%), Amazon (-2.45%), Alphabet (-2.48%), Facebook (-2.29%), and Microsoft (-1.43%).
By contrast, utilities (+1.66% WTD) and real estate (+0.28%) continued their winning streak. Healthcare weathered the storm too (+1.18%) but we should keep in mind that this sector still exhibits the poorest YTD return (+3.27%), far from the best performer: real estate (+18.01%).
Unsurprisingly, as flight-to-quality plays dominated global markets, the 10-year U.S. T-Note yield slipped to 2.29% on Thursday, the lowest level observed since mid-October 2017, with the key parts of the yield curve inverted (3-month T-bill yield at 2.34%), as anticipated last week. The 10-year yield last stood at 2.32%.
On the credit side, it is worth noting that the high-yield segment remained quite stable (-0.06% WTD in Europe and -0.07% in the U.S.).
Find the full report here: https://www.trackinsight.com/weekly-flow-report/2019-05-24/global