Unsurprisingly, the Federal Reserve left interest rates unchanged on Wednesday but announce it would halt its balance-sheet reduction programme in September, against a backdrop of sluggish economic growth both domestically and abroad. The Markit PMI data released on Friday reinforced concerns about the worsening economic outlook as German and French manufacturing activity contracted further in March (significantly below 50). It fell to its lowest level since 2013 suggesting that the eurozone may be on the verge of recession. To make things worse, the probability of a hard Brexit has gone up considerably after House of Commons speaker John Bercow said Theresa May could not bring back her deal to the Parliament without substantial changes on the one hand and after a weekend of speculation about her leadership and claims of a plot to oust her on the other hand. In these conditions, needless to say that all the European indices took the biggest hit (MSCI EMU losing 2.07 percent WTD even though the German and French benchmarks – DAX30 and CAC40 – slid by 2.75 and 2.50 percent respectively).
The last week rebound on Wall Street was also challenged as the U.S. Manufacturing PMI fell to 52.5 in March from 53 in February (below market expectations of 53.6). The U.S. stockmarket erased 10-day gains and therefore finished the week in the red (Nasdaq and S&P500 down 0.60 and 0.77 percent respectively). In contrast, Asian and emerging markets eventually managed to stay in positive territory (MSCI EM: +0.22 percent ; Nikkei225: +0.82 percent; Shangai Composite: +2.73 percent).
Among sectors, financial stocks which are particularly sensitive to interest rates were by far the most affected by the Fed decision, tumbling 4.85 percent! Others also struggled to limit losses, especially trade-sensitive sectors such as industrials (-1.52 percent WTD) and materials (-2.01 percent), due to the lack of visible progress in ending the U.S.-China trade war. The best performers were consumer discretionary, consumer staples, tech and utility stocks.
The flow of weak manufacturing data from the U.S. and Europe logically led to lower yields on Government bonds as well as an inverted curve flashing the first warning signal of a possible recession. Thus the U.S. 10-year T-note yield slipped to as low as 2.44 percent on Friday, its lowest level since the end of 2017. The 5-year yield dropped to 2.24 percent, i.e. below the current Fed funds rate around 2.40 percent. In Germany, the 10-year Bund even exhibited a negative yield (-0.02 percent) thereby reflecting growing risk aversion.
In commodity markets, the gloomy mood pushed gold futures above $1,320 a troy ounce, while crude oil gained 0.89 percent (WTI: $59.04).
Find the full report here : https://www.trackinsight.com/weekly-flow-report/2019-03-22/global