Global Weekly: Calm returns to equity markets

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Stock markets were calm this week, with stocks in the US and Europe rising slightly compared with last week. Investors have become less concerned about an escalating trade war between the US and China, following comments by the Chinese President Xi Jinping about opening the Chinese economy and reducing tariffs on imported cars. The possibility of a US military strike on targets in Syria did not worry investors too much. The oil price, however, did react and rose some 5%.

This week’s best performing sectors were technology and energy. Technology shares were helped by strength in semiconductor stocks as well as the rebound in Facebook’s share price. Facebook rose as investors concluded that heavy regulation is unlikely in the near term, following CEO Mark Zuckerberg’s testimony before the US Congress. Energy stocks gained on the back of the rising oil price. DSM shares rose sharply on Thursday, after the Dutch materials company lifted its outlook for the year. The first quarter earnings season will start next week with companies like Netflix, IBM, Goldman Sachs, Procter & Gamble and ASML reporting their numbers. We expect the earnings season to be strong.

Stable bond markets

Yields on German 10-year Bunds remained stable this week and continued to trade at around 50 basis points. The trend of falling yields since mid-February, driven by fears of a trade war escalation and higher risk aversion, seems to have come to an end for now. Political risks are not yet off the table, but the focus in the media has shifted from headlines about trade policies to headlines about a possible new military escalation in Syria. After a threatening tweet of US president Trump directed to Russia, a White House spokesman tried to calm the situation by stating that no final decision had been made regarding a retaliatory attack. If political risks fade, a further Bund rally – sending yields clearly below 50 basis points – would become unlikely.

Monetary policy could once again create triggers for higher yields. On Wednesday, minutes from the Federal Reserve’s March policy meeting were released. The minutes showed that Fed policymakers maintained a positive growth scenario, indicating the necessity of further official interest rate hikes (which would impact the short-end of the yield curve). All members of the Fed’s policy committee expected higher inflation. The recent increase in oil prices may provide additional support for this view. While waiting for further guidance, markets were calm this week and risks premiums on peripheral, corporate, emerging-markets and high-yield bonds remained relatively stable.