Weekly Market Report – 08.10.2018

Market Summary

Asia

Markets across Asia struggled all week, with concerns over U.S.-China trade issues once again at the forefront on investor’s minds, although mainland Chinese markets were closed all week in celebration of the country’s National Holiday. Hong Kong led the way lower with a 4.4% weekly loss as mainland Chinese companies listed there got hit hard. South Korea’s Kospi was also a big loser for the week, ending with a weekly loss of 3.3% as it’s racked up five consecutive losing sessions. Japan’s Nikkei began the week with strength, but a firming Yen sent the index into negative territory by the end of the week for a loss of 1.4% on the week. Australia’s S&P/ASX was a bright spot in the region at the conclusion of the week, but the losses from early in the week ensured a 0.4% weekly loss for the index.

The coming week will be interesting as Chinese investors return from a week long holiday. Given the extremely negative sentiment across the Asian region last week, and the Bloomberg report that came out on Thursday alleging Chinese companies implanted spy chips in products shipped to Apple and Amazon, markets across the region are likely to continue their slide, led by mainland China. The one bright spot should be financial companies as the recent surge higher in bond yields is a positive for the companies that benefit from rising interest rates, such as banks and insurance companies.

Europe

European markets wrapped up last week with weakness as investors fretted over rising U.S. Treasury yields, and European government yields began to follow the example set by U.S. bonds. The Stoxx Europe 600 suffered a second weekly loss as it fell 1.8% for its worst weekly performance in a month. Germany’s DAX was the best performing European market as it fell just 1.1%, but the CAC 40 in France lost 2.5%. The worst performance in the region came from the U.K., where the FTSE fell 2.6%. The British benchmark equity index came under pressure from a stronger Pound in addition to the worries over rising bond yields.

The coming week could see even sharper declines if U.S. Treasury yields continue climbing. That could well happen too as the U.S. unemployment rate dropped to a 49-year low of 3.7%. European investors also have the Italian budget deficit to contend with, and while they were able to put aside their concerns over U.S.-China trade relations last week due to Chinese markets being closed all week, they will have to face the music this week as Chinese investors will return to react to the broad based losses seen across Asia last week, especially in Hong Kong.

U.S.

U.S. markets fell for a second consecutive session at the end of last week, sending most of the major indices into negative territory for the week. The Dow was the best performer, edging lower by a slight 0.04%, but the Nasdaq dropped 3.2% for the week as technology remained under pressure for most of the week. The S&P 500 had a more modest decline of 1.0% for the week. The drop in equities were a result of rising Treasury yields in the U.S. following stronger than expected economic data from the U.S. this past week that increased the chances of four more rate hikes from the Federal Reserve by the end of 2019.

The coming week could be much better for stocks if the gains in Treasury yields slow or halt. With equities being depressed in the past week a rebound effect could ensue if we get a drop in Treasury yields, which would likely give us one of the strongest weekly performances of the year. The week could start off with more declines, but we get U.S. PPI and CPI data later in the week that will likely drive market performance. On the one hand the data could be in line with expectations or weaker than expected, which would be bullish for equities. If inflation seems to be ticking up however, expect a bearish scenario similar to the one seen this past week.

Gold/Crude Oil

Gold made a strong gain last Tuesday, and followed that up with a gain on Friday that kept the precious metal in positive territory for a weekly gain of 0.8%. It was the strongest weekly performance by the precious metal in six weeks. The coming week will be interesting as gold picked up last week in response to weakness from the U.S. dollar. That isn’t guaranteed to continue, and gold is also facing rising bond yields, which are historically bearish for the yield-free asset.

Crude rose to a four-year high by Wednesday last week, but then pulled back as traders are uncertain over the impact of sanctions against Iran. While there is a general consensus that there will be a good amount of lost production once sanctions take effect, it’s uncertain whether that lost production will be, or even can be, met by increases from OPEC and Russia. U.S. benchmark West Texas Intermediate crude gained 1.5% for the week, while Brent crude advanced 2.4% on a weekly basis. The coming week will continue with the same questions from traders, but the overall sentiment so far has been that crude production will take a hit, and the strong U.S. economy is bound to help demand.

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