Week in Review: Trade War Tensions Flare Up

Volatility returned to financial markets early in the week, as rising trade tensions between the U.S. and China drove concerns that global growth could be negatively impacted. China announced retaliatory tariffs on $60bn worth of U.S. goods in response to last week’s tariffs imposed on China.

As the week unfolded, markets recovered on optimism that the latest tariff news is a temporary setback and that a deal can still ultimately be reached. This was further supported by Trump’s administration deciding to delay auto tariffs with the EU and Japan, along with U.S. consumer sentiment reaching a 15-year high as well as encouraging U.S. quarterly earnings announcements.

Fed Vice Chairman, Richard Clarida, stated that the domestic economy was "at or close to" the Fed's dual mandate of maximum employment and price stability. He further reiterated that inflation was running close to the central bank’s objective of 2%.

In Brexit news, Theresa May is putting plans in place for her resignation. She agreed to set out a timetable for her departure following one final attempt to get her Brexit deal passed by MPs early next month. Meanwhile, U.K. unemployment dropped to its lowest level since 1974. Unemployment edged lower to 3.8% in the three months to March.

China released a host of economic data during the week, generally reflecting a softer economy. China’s retail sales rose 7.2% in April, the slowest pace in 16 years. April industrial production rose 5.4%, less than the 6.5% expected.

For the week, global equity markets were mostly weaker, with European markets being the exception. In the U.S., the Dow Jones (-0.69%), S&P 500 (-0.76%) and Nasdaq (-1.27%) Indices were all weaker. In Europe, the Euro Stoxx 50 (+1.92%) and FTSE 100 (+2.02%) both ended the week in positive territory whilst Asian markets were also softer with the Nikkei 225 (-0.44%) and Shanghai Composite Index (-1.94%) negative.

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Market Moves of the Week

 

Locally, unemployment advanced to 27.6%, higher than expectations. March retail sales recorded an increase of 0.2% on an annual basis, compared to expectations of a 0.6% increase.

At the well published Goldman Sachs conference held in Johannesburg this week, President Ramaphosa stated “We're now going to reconfigure our cabinet as part of the reform package our country needs for the economy to move forward and address the needs of our people,” The president will announce his new cabinet on 26 or 27 May which will be closely watched by investors.

In other news, Moody’s Investors Service said South Africa’s long-term growth outlook remained weak with the country’s fiscal strength eroding, but that a proven resilience to absorbing financing shocks still supported the economy’s credit profile.

The JSE All Share Index ended the week down -1.05%. The resource sector (+0.97%) was stronger against weaker performances from industrials (-1.15%) and financials (-2.60%). The rand along with other emerging market currencies came under pressure, trading at R14.41 to the U.S. by Friday close.

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Chart of the Week

chart of the week 18 may 2019

Bondholders of Eskom Holdings SOC Ltd. appear to be taking South Africa’s President Cyril Ramaphosa at his word. Even after data showing that the state-owned power utility’s debt is approaching $35bn, yields on the company’s dollar bonds ticked lower this Wednesday as investors bet that the South African Government would step in to prevent any chance of a default.

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