Global Weekly: Positive momentum

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It has been a positive week for equities. Asian indices rose most, followed by the US. Minor gains were recorded in Europe. In line with this positive momentum, most sectors managed to rise, except for the utilities and energy sectors. The strongest sectors were materials and consumer discretionary.

European steel producers were unaffected by the announced tariffs on steel (25%) and aluminium (10%). They benefitted from strong economic results and China’s intention to reduce steel overcapacity. US chemical company DowDuPont rose more than 8% this week. The company stated to be confident about the future and not to expect any negative impact from the US tariffs. DowDuPont’s upbeat remarks contributed to the strong performance of the materials sector.

Equities were supported by strong US economic data. This led to higher confidence in the strength of the US economy. There were more jobs created than expected and the unemployment rate reached 3.8%, the lowest level since 1970. In addition, forward-looking economic confidence indicators point to continuing economic growth. Purchasing managers both in the manufacturing and the services industries were more positive on future business prospects than anticipated.

Utility stocks were among the weakest performers. The sector has been under pressure for several weeks now. In Europe, the sector is suffering from political tensions in Italy and Spain; in the US, utilities were hurt this week by rising interest rates.

General Motors was one of the strongest performers this week. Shares soared 16% after the Softbank Vision Fund invested USD 2.25 billion in GM’s self-driving car division. Investors believe GM is able to compete with Google in the area of autonomous cars.

Bonds – situation in Italy still fragile

With the risk of new elections in Italy having subsided, markets are looking for clues about the new Italian populist coalition’s policy agenda and priorities. Italian bond spreads recently retreated from stretched levels. However, we think that the situation will remain fragile as we expect to see clashes between the Italian government and the EU on the economic ruleset over the coming months. Changing the economic EU rulebook is likely to be the focal point of discussion rather than leaving the eurozone. Thus we believe that markets will continue to be very headline-driven. Contrary to the situation in Italy, we expect Spain and Portugal to benefit from rating upgrades by credit rating agencies. The fact that Spain now has a new socialist government will probably not lead us to change our view, as this government should be even more pro-Europe.

Following the recent market turmoil and the weakening growth outlook in the euro area, all eyes will be on global central banks but particularly on the ECB, as its policymakers will meet on 14 June. At this meeting, the ECB will likely signal an important policy change, as headline inflation has spiked despite recent deteriorating economic data.

Recent positive developments in the US-China trade conflict were short-lived. The risk of a renewed escalation over the coming weeks has increased again, leaving the 10-year US Treasury yield in wait-and-see mode below the 3% resistance level. Investors are now focusing on 15 June, when US President Donald Trump plans to announce a specific list of targeted goods for USD 50 billion in Chinese imports. China’s response could affect investors’ risk appetite.