This week in the markets
Stronger global growth and higher oil prices push treasury yields to seven-year high
May 18, 2018
Government bond yields rose around the globe this week, as data pointed to stronger economic growth and as oil prices continued their climb to multi-year highs. U.S. 10-year treasury yields and Canadian government bond yields jumped to their highest levels since 2011 and 2014, respectively. Stocks in Canada and most European markets advanced; but as interest rates rose, the resulting strength in the U.S. dollar and the implied higher inflation risk pressured stock valuations in the U.S. Meanwhile, gold tumbled below USD $1,300/oz for the first time this year.
Canada’s S&P/TSX Composite index saw broad strength, and finished the week with its 11th straight day of gains. Only the interest rate-sensitive utilities, staples, and real estate sectors lost ground in response to the rising interest rates, while higher crude prices lifted the energy sector. Speculation about possible supply disruptions focused on multiple fronts: the impact of recently reinstated U.S. sanctions on Iran, the eruption of violence in the Gaza strip, and the deteriorating political situation in Venezuela. The industrials and consumer discretionary sectors were especially strong as trade officials suggested NAFTA negotiations could be close to wrapping up (the discretionary sector includes auto-parts maker Magna International Inc., which also got a boost from a strong earnings report late last week.) The health care group advanced after a successful debt offering boosted Valeant Pharmaceuticals, and merger and acquisition activity heated up the cannabis stocks.
U.S. stocks struggled this week despite signs of accelerating economic growth – the S&P 500 was down slightly. Better-than-expected April retail sales and industrial production, and higher readings from both the Empire State Manufacturing Survey and the Philadelphia Fed Business Outlook Survey, all pointed to broad-based strength. But investors showed signs of worry over higher interest rates and the rising U.S. dollar, which climbed to its highest level year-to-date versus other major currencies. The so-called “bond proxies” (real estate, utilities, telecom services) dropped in the face of higher bond yields while technology and financials were also in the red. The energy and materials sectors led the gainers. Geopolitical news was a mixed bag, with hope of progress on NAFTA and signs President Trump was looking to de-escalate trade tensions with China on the one hand, and renewed uncertainty about North Korea on the other hand.
Once again Italy stood out on the downside among major European equity markets. Italian stocks dropped as two euro-skeptic, populist parties forged a new coalition government. The heightened risk to euro-area integration also pressed the euro currency to five-month lows. Weaker currencies helped stocks in Germany, France and the United Kingdom all advance (the British pound, weighed by Brexit uncertainties, dipped alongside the euro to its lowest level this year.) The Japanese yen similarly retreated to a four-month low, and stocks there were further pressured by a report that the country’s economy shrank in the first quarter of 2018. It was the first drop in GDP in over two years and snapped the longest growth streak in 28 years. Japan was also reported to be considering retaliatory tariffs against the U.S. Among major U.S. allies, it is the only one not to have received an exemption yet from President Trump’s recently announced tariffs.
What’s ahead next week:
- Wholesale trade sales (March)
- Release of May 2 Federal Open Market Committee (FOMC) meeting minutes
- Markit Purchasing Managers’ Indices (May)
- New and existing home sales (April)
- Durable goods orders (April – Preliminary)
- University of Michigan Consumer Sentiment Index (May – Final)
This weeks market closing values