Investment Markets Overview – W/E 26th May 2017

Spain……officially know as the Kingdom of Spain, is the second largest country by size and the 4th largest economy within the European Union. Its 46m population reside within 17 “autonomous regions,” including two archipelagos, the Balearic Islands and the Canary Islands, with Madrid being its capital city. Spain suffered badly following the financial crisis with unemployment rising to 27% as the property bubble burst, with the subsequent downturn witnessing a polarising society as has been the case elsewhere. Catalonia, by far the richest region in Spain and therefore an increasing source of Government revenue to prop-up the rest of the country, pushed for an “independence referendum” in 2011, just as the stock-market, the best “barometer” of Spain’s “collective social mood, was approaching its nadir. The demand was rebuffed by the government and has subsequently “waned” as stocks recovered with Spain out-performing the Euro-Area economic growth rate of late, following the tighter fiscal policies implemented in 2012 and with unemployment easing to about 17% now. However, a glance at the nation’s main stock-index, the IBEX 35, which remains some 30% below its 2007 all-time-high, notes it to be stalling once more. Our analysis suggests that the mood is about to darken and with it the Catalonia independence demand will return to centre-stage.

Confusion reigned in respect of crude oil this week, as the price was buffeted by the conflicting desires of OPEC and America. A timely “knowledge share” was posted on Wednesday, “Critically Crude” which hopefully provides some guidance for you. For the rest of this week’s major economic and market news, with interesting charts and some geopolitical insights, please continue, with a reminder for non-subscribers of the limited-time offer “at your discretion”:

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US economic data included further evidence of a slow down in manufacturing, as the May PMI eased to 52.5 versus April’s 52.8, whilst the services sector inched higher, from 53.1 to 54. Consumer sentiment fell to 97.1 from 97.7, according to the final University of Michigan survey for May, but there was better news in respect of GDP, where the second reading for Q117 saw an improvement to 1.2% from the initial 0.7% reported, buoyed by personal consumption. On the housing front, prices eased to 0.6% in March versus February’s 0.8%, according to the FHFA, whilst April new home sales contracted by -11.4% as the more important existing home sales fell by a more modest -2.3%, It’s of interest to compare the average price of existing homes against the falling level of stock for sale, where the lower line shows the decline of inventories on a rolling annualised basis:

The Dow rose by 1.3% whilst the SPX and the NASDAQ were higher by a respective 1.4% and 2.1%.

Euro-Zone economic data was scarce this week but did include the provisional May PMI numbers, where manufacturing came in at 57 against April’s 56.7 as services eased to 56.2 from 56.4.

UK housing loans fell in April according to the British Bankers Association, whilst the estate agent consolidator, Rightmove, reported a pick-up in prices in May, rising by 3% annualised versus the 2.2% it stated for April. The public sector net borrowing was above forecasts for April but our focus this week is on the second reading of the Q117 GDP figures, revised lower to 0.2% and 2% annualised. In the main this was due to private consumption, which halved to 0.3% Q on Q against the initial 0.7% reported. A comparison of the two variables shows a close correlation and it doesn’t auger well:

The FTSE 100 gained 1% with the French CAC inching higher by 0.2% as the German DAX eased by 0.3%.

Out East, Japan’s trade surplus fell in April as exports grew by 7.5% annualised following March’s 12%, whilst imports grew by 15.1%, albeit a slight fall from the prior 15.8%. April department store sales rose by 0.7% year-on-year after the -0.9% contraction of March, whilst the April PPI services rate grew by 0.7% following March’s 0.8%.  CPI inflation was reported at the expected 0.4% for April, double the 0.2% reported for March, which will have please policy-makers, although it’s of interest to note that Abe’s preferred CPI ex fresh food & energy gauge (as it used to rise by more than CPI) is now under-performing, coming in at 0% annualised and remains a far cry from the Bank of Japan target rate of 2% annualised:

Elsewhere, annualised CPI in Hong-Kong jumped to 2% in April versus March’s 0.5% rate, whilst for Singapore it was 1.7% versus 1.2% as the Island state also reported Q117 GDP at 2.7% annualised following the 2.5% of Q416.

The Nikkei rose by 0.5%, whilst the Hang Seng added 1.8%.

The $US index rose by 0.3% to 97.4, with other risers including the $KIWI and the Yen, higher by 0.5% and 0.45%, whilst fallers included the British Pound and the Euro, lower by a respective 1% and 0.2%. Sovereign bond yields were in the main lower as Japan’s JGB 10-year yield was unchanged at 0.03%, the UK 10 year yield fell by 8bps, at 1.01% whilst the German yield fell by 0.4bps, to 0.32%. Spain’s 10-year yield gave-up 4bps, at 1.51% with Italy’s lower by 4bps at 2.08%, as the Irish 10-year yield gave up 0.05bps to 0.75%. Portugal’s 10-year ended lower by 4bps at 3.11% whilst the Greek yield gained 31bps to 5.85%. US 5 and 10-year yields inched higher by a respective 0.2%, with the 5 closing at 1.79% and the ten at 2.25%.

Commodities were mixed as $Oil fell by 1.7% to $49.8 a barrel, whilst the CRB slipped by a similar 1.7% and Copper by 0.6%. Within the precious metals space $Gold gained 1.2%, at $1268, $Silver was ahead by 3.1%, at $17.3, whilst in the paper-market, the XAU eased by 0.6%:

Economic data due for release during the holiday-shortened trading week for the US and the UK includes confidence readings for the US, the UK plus the Euro-Zone and Japan. Housing data is scheduled for the US, the UK and for Japan, with the US and Japan also updating on vehicle sales. The UK and the Euro-Zone provide the latest money-supply numbers, with the former also updating on consumer credit and the E-Z PPI. The April unemployment rate for Japan, the E-Z and the US will be released, with the US as the highlight of the week as it includes the closely watched non-farm payrolls.

Sicily has been an autonomous region of Italy since 1946 and is the largest Mediterranean island, with a population of 5m. Aside of having Mount Etna, the tallest active volcano in Europe, it is famed as the birthplace of the Cosa Nostra, or Sicilian mafia, hence it was a suitable venue for this week’s G7 (gang of seven) heads of state meeting. It formed part of a busy week for “the Donald’s” first trip abroad as the US President and after securing huge US investments from Saudi Arabia, including weapons of course, then meeting with the Pope, he pitched-up in Europe to give his fellow NATO members’ a roasting over not paying their fair share, a fact highlighted during his election campaign. Of the 28 members it appears that only 5 contribute the 2% of GDP agreed, with the US leading the pack at 3.6%, followed by bankrupt Greece at 2.4% with the German locomotive contributing just 1.2%, which possibly explains why it is Europe’s locomotive! As for the G7 meeting itself, German Chancellor Merkel was the longest-serving head at the summit with 4 leaders including DT attending their first one, they “agreed to dis-agree” on the thorny issues of climate change and trade. The Italian host, Paolo Gentiloni, said that an ‘equilibrium point” was found in the shape of a commitment to “keep our markets open and to fight protectionism,” while acknowledging that “trade has not always worked to the benefit of everyone.” It should be an interesting week ahead to watch the share price of the German car manufacturers.

                                                    “I’m gonna make them an offer they can’t refuse”

NB the IMA indices are £GBP adjusted

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