Global Weekly: From Facebook to the Fed

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Equity markets had a tough week and lost 3-4%. A number of events grabbed investor attention, ranging from the (data) crisis around Facebook, to the Federal Reserve's latest meeting with the new Fed Chair Jerome Powell and additional announcements on US trade tariffs.

Until Thursday, headlines were mostly dominated by the data debacle around Facebook. Facebook published a press release on Friday saying that it banned Cambridge Analytica, a political data firm that worked with the Trump presidential campaign, from its platform. The press release said the firm violated rules by failing to delete user data collected by an app for research purposes. Cambridge Analytica harvested private information from Facebook profiles of more than 50 million users without their permission. The scandal has reignited the discussion and fear about the safety of private user data and how that data can be used by various groups, organizations or companies. As a consequence, the stock took a serious beating.

Later in the week, investor attention shifted back to the global trading tensions with an announcement by Donald Trump on import tariffs for China totalling around USD 50-60 billion. Obviously, investors are concerned about the potential negative impact on global trade and as a possible consequence, slower growth and higher inflation. China responded with plans for tariffs on 128 US goods worth USD 3 billion. It also wants to sit around the table with the US, which indicates they do not want to escalate and find themselves in a trade war. As we do not expect an escalation of trading tensions, we believe current developments are transitory and that the backdrop for equity markets continues to be supportive.

A predictable Fed

This week, bond markets closely watched the press conference of the US central bank. The new Fed Chair Jerome Powell raised the Fed funds rate by 25 basis points, as expected. The central bank seems to be following a clear and predictable path. It indicated two more interest rate hikes in 2018 and three steps in 2019. Ten-year US Treasury yields quickly increased to 2.93% after the announcement, but soon returned to week-start levels. Rates continue to move in a trading range between 2.8% and 2.95% and have not shown any severe break-out attempt since mid-February. Ten-year German Bund yields did not permanently exceed a threshold of 60 basis points, but then decreased significantly on Thursday, when new political risks from the US led to a flight to safety.

Until this ‘risk-off’ moment, risk premiums for peripheral government bonds had decreased, especially for Italy and Spain. Italian election winner Luigi Di Maio of the Five Star Movement publicly emphasized that his party aims to reduce Italy’s debt and he has already taken back major anti-European statements. However, the situation of exploratory talks in Italy is still blurry, as differences between the Five Star Movement and Lega Nord remain considerable.

In Spain, the expectation of a positive rating change has driven the demand for government bonds. Investors seem to see more risk in the corporate bond market. Risk premiums for both euro-denominated investment-grade and high-yield bonds have continued to rise and are now at the highest levels since the start of year. These valuations are not alarming, however, compared to historical spread premiums in this market.