Market Action

Global equities rose last week amid signs that central banks are preparing to act if the global economy continues to weaken. With the market pricing in multiple rate cuts from the US Federal Reserve, the yield on the US 10-year Treasury note fell 11 basis points last week to 2.06%, the lowest level in 17 months. The price of a barrel of West Texas Intermediate crude oil declined $1.50 to $53.40 as the commodity entered a bear market, slipping more than 20% from its April peak. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), declined to 16 from just above 19 a week ago.

After 1,059 days in charge, UK Prime Minister Theresa May officially stepped down as leader of the ruling Conservative Party. The race has already started to replace her, with 11 contenders and Boris Johnson the current favorite. Starting next week, the party’s 300 or so MPs will whittle down the field of candidates to two through successive rounds of voting. After that, the party’s rank-and-file members, an estimated 124K people, will decide which of those two finalists gets to be leader.

The global manufacturing sector continues to cool, as illustrated by a contraction in a widely followed sentiment index published this week. The J.P. Morgan global purchasing managers’ index fell to 49.8, the lowest level since October 2012. More than half of the world’s manufacturing PMIs contracted in May. Germany reported a staggering 3.7% plunge in April exports – the most in nearly four years – alongside a 1.9% contraction in industrial output. In the US, manufacturing expanded modestly, with the Institute for Supply Management’s PMI reading at 52.1 in May, a decline from April’s 52.8.

Three of the world’s most influential central banks signaled this week that they are ready to take action if the global economy continues to weaken:

At a conference in Chicago this week, US Federal Reserve Chairman Jerome Powell dropped the word “patient” from his description of the central bank’s policy stance. He said instead that the Fed is monitoring the implications for the US economy of trade developments and will act as appropriate to sustain the expansion. Markets continue to price in rate cuts, with multiple rate cuts possible by the end of the year.

Later in the week, European Central Bank President Mario Draghi acknowledged that some members of the Governing Council raised the possibility of a rate cut at the council’s Thursday meeting while also postponing any hike until the middle of 2020. The ECB additionally laid out the parameters for another round of cheap loans in order to ensure ample liquidity in Europe’s banking system, though the new loans will be slightly pricier than the ones they are replacing.

On Friday, the People’s Bank of China indicated that it has ample room to ease monetary policy further if the trade war deepens.

Meanwhile, two central banks lowered rates this week: The Reserve Bank of Australia cut its overnight lending rate to a record low of 1.25% while the Reserve Bank of Indian trimmed its repo rate for the third time this year, to 5.75%.

Updated market return figures

What Could Affect Markets in the Week Ahead?

China released a white paper critical of the US, blaming it for backing away from a trade deal in early May. At the same time, the country reiterated its willingness to renew talks. The first direct contact between the two sides will take place this weekend in Fukuoka, Japan at a meeting to prepare for the full G20 summit that will take place later in June in Osaka, Japan, at which US Secretary of the Treasury Steven Mnuchin is set to meet People’s Bank of China Governor Yi Gang.

Mexican officials arrived in Washington to try to short-circuit a planned 5% tariff on products from Mexico set to be put in place on Monday. If a duty is levied by the United States, it will rise 5% each month until it reaches 25% in October. US President Donald Trump said progress had been made in the talks but not enough to prevent the tariff. Mexican President Andrés Manuel López Obrador said he hopes a deal can be reached, praising the US for remaining open to dialogue. Congressional Republicans are opposed to using tariffs to combat non-trade-related matters and have threatened to overturn the levy.

The European Commission called on Italy to cut its fiscal deficit by €4 billion and said it will begin an excessive deficit procedure, which could result in fines and the withholding of some funds from the European Union if Italy does not comply.

This Week From BlackSummit

Crossroads: At the Intersection of Geopolitics and Geoeconomics
Rachel Poole

Recommended Reads

A bigger role for green bonds | Financial Times

Lessons to be drawn from Trump’s Mexico tariffs threat | Financial Times

Plunging Yields Expose Sorry State of European Banks – WSJ

Opinion | When China Massacred Its Own People – The New York Times

Image of the Week

The recent DOE report was very bearish for crude prices; prices were down by as much as $2.75, but recovered ending that day down about $1.75. Formally, crude prices are in a bear market as they have fallen more than 20% from their April peak The increasing global supply of crude oil along with concerns of ever slowing demand growth for crude have caused the bear market.

The chart above was generated using Fundamental Analytics. For more information, visit www.fundamentalanalytics.com where you can sign up for regular updates and a trial of the platform to conduct your own research.