Asian markets experienced trade-war related volatility during the week, ending mixed as results seesawed back and forth on investor sentiments and expectations. Not surprisingly, the mainland Chinese Shanghai Composite led losses in the region, down 1.2% for the week. Losses could have been worse on the mainland, but markets were closed the final two trading days of the week for a public holiday. Hong Kong’s Hang Seng went its own way during a holiday-shortened week as well, finishing the week lower by 0.8%. And South Korea’s Kospi fell 0.7% as technology remains under pressure. On the bright side, Japan’s Nikkei gained 0.5% for the week as the Yen softened mid-week. And Australia’s S&P/ASX 200 surprisingly led gains in the region as it advanced 0.8% on a weekly basis.
The upcoming week in Asia should once again be dominated by trade war talk, especially with President Trump still railing against the trade deficit with China and calling for an additional $100 billion in new trade tariffs. Monday could be quite bad for Chinese investors after the two-day holiday that ended last week, as the Shanghai Composite will need to catch up to the latest developments. We could get more tariffs out of China over the weekend as well, which will almost certainly cause more drops across the Asian region. We’ll also be keeping a close eye on Japan. Even though that country won’t be heavily impacted by a U.S./China trade war, it could see the Yen strengthening on safe-haven demand, and that would be bad for Japanese equities.
Despite falling in three of the four sessions during the holiday-shortened week, European markets made good gains, especially when compared with markets across the rest of the globe. The Thursday rally that saw European markets making their best daily gains in two years was enough to give the Stoxx Europe 600, the broadest measure of European equities, a 1.1% weekly gain. Germany’s DAX did slightly better as it advanced 1.2% for the week. In Paris, the CAC 40 led the European region as it tacked on 1.8% for the week, and London’s FTSE wasn’t far behind with a weekly gain of 1.7%. For the most part the market action in Europe was driven all week by concerns over the brewing trade war between the U.S. and China.
The coming week is likely to have the same dynamic as the past week, with investor sentiment determined by the actions of the U.S. and China in regard to tariffs. Monday could see heavy selling in response to the Friday rout on Wall Street and as investors take a more negative view of the determination by U.S. President Trump that another $100 billion in Chinese imports must be targeted for tariffs. Add to that the potential for Chinese retaliation and we could see European markets giving back all the gains from the prior week right at the start of the new week.
U.S. markets, which have been leading action across the globe, saw the worst losses of major equity markets as investor sentiment has been turning decidedly negative over the brewing trade war and President Trump’s unwavering desire to cut the U.S. trade deficit with China substantially. By the close of trade Friday, the Dow had lost 0.7% for the week, while the S&P 500 fell 1.4%, and the Nasdaq lost 2.1%. U.S. markets saw drops of more than 2% both Monday and Friday last week, and the S&P has now seen more than three times the number of sessions with moves of more than 1% in 2018, than in all of 2017. While the materials and industrial sectors have been taking the brunt of the losses, the financial sector also fell sharply on Friday, and the thin volumes in markets are only serving to amplify the large moves being seen.
The coming week will almost certainly see volatility continuing for U.S. markets, as there is little chance that President Trump will back down on his deficit reduction agenda, and a very high chance that the Chinese government will retaliate further in response to the call for tariffs against another $100 billion in Chinese imports to the U.S. Friday’s drop has taken the Dow Industrials into correction territory, defined as a drop of more than 10% from the most recent high. The S&P 500 is just 20 points, or less than 1% from correction territory, and the Nasdaq is only 42 points, also less than 1%, from correction territory.
Gold had a choppy week, but finished with a 0.9% weekly gain as the uncertainty and risk aversion caused by the trade war issue helped lift the safe haven asset. Weakness from the U.S. dollar provided some additional lift. Gold has shown some signs that it is overextended, but as long as uncertainty and risk aversion remains the yellow metal will be able to continue making gains.
Crude has been pressured lower by thoughts of falling demand if the current situation turns into a full blown trade war. On a weekly basis crude was 4.4% lower, nearly erasing all the gains made in the previous week. Putting additional pressure on crude at the end of the week was a jump in active U.S. rig counts, and news that Bahrain had found a large shale oil deposit off its coast. It’s nearly certain we will see crude falling as the week kicks off, but a rebound could be in the works by the end of the week if trade war thoughts recede.
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