How can we explain the five-day streak of losses heading into August? U.S. stocks started to slump on Wednesday after Jerome Powell suggested that the Fed’s rate cut (25bps) was a mid-cycle policy adjustment (i.e. a one-time event). To make things worse, Donald Trump suddenly threatened to impose a 10% tariff on $300bn worth of Chinese goods by September, thereby pilling even more pressure on Jerome Powell. In one word, the straw that broke the camel’s back. The S&P500 finished down 3.10% over the week. The Nasdaq and DJIA dropped 3.92% and 2.6% respectively. Same consequences on European stocks (MSCI EMU down 3.84%) and Asian stocks (Shangai Composite down 2.61%). Emerging markets were hit even harder (MSCI EM dropping 4.28%).
Unsurprisingly, the abrupt escalation of trade dispute had a detrimental effect on most of the sectors except for the most defensive ones, utilities (+0.25%) and real estate (+2.05%). Technology companies, which get a sizeable portion of their revenue from China, were the hardest hit, tumbling 4.36%.
By contrast, the flight-to-quality was a boon to sovereign and investment grade corporate bonds. The U.S. 10-Year Treasury yield fell to 1.86% from 2.08%. That being said, it should be noted that the yield differential between the 3-month T-bill and 10-year T-note was widening significantly from 4bps to 20bps! The 10-year Bund yield slid to -0.50% reflecting the greater risk aversion in Europe too.
Like other safe haven assets, gold also rallied, jumping above $1,445/oz (+1.85% WTD).
Find the full report here: https://www.trackinsight.com/weekly-flow-report/2019-08-02/global