Global Weekly: Record highs for US indices

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The S&P 500 Index (+1.4% since Friday) and the Nasdaq (+2%) both reached new all-time highs during a trading week that was dominated by a ‘risk-on’ attitude before sentiment deteriorated on Friday. Again, the IT sector and specific players within the consumer discretionary sector – like Amazon – were the main drivers. Investors moved out of defensive sectors like telecom, similar to what we have seen in the last two years.

A positive trigger came from the bilateral trade agreement between the US and its southern neighbour Mexico. Through its many car production facilities, Mexico is an important supplier to the US market. Consequently, this trade deal was seen as positive for car makers like Ford, which rose by around 3%.

Asian equity markets saw strong gains too, as the People's Bank of China re-introduced a mechanism to support the Chinese currency which has weakened in the last two months. European equity markets, as measured by the Stoxx 600 Index, benefitted only marginally  (+0.5%) from this week’s risk-on sentiment. The consumer discretionary, materials and industrials sectors led the way, while energy lagged.

Shares in Inditex, the company behind the popular retail store Zara, were among the biggest decliners this week (-8%) after worries about future sales growth and the impact of e-commerce competition. Air France-KLM shares fell 7%, as labour unions maintained their demands related to a lingering dispute over salaries. Mall operator Unibail-Rodamco-Westfield declined as well. For the first time after Unibail-Rodamco’s take-over of Westfield, the company released results. Rental income growth was above-average strong. Disappointed investors, however, sent shares in Unibail-Rodamco-Westfield 6% lower, as company management failed to provide clear guidance.

Opportunities in emerging markets?

At present, the prospect of an inversion of the US yield curve is one of the hottest topics in global capital markets. Yield curve inversion refers to a – rare – situation where yields on short-term bonds are higher than yields on bonds with a longer maturity. In the past, inverted yield curves often preceded economic downturns – which explains why the US Federal Reserve is closely monitoring yield curve developments. On the one hand, the Fed appears to be more worried about such an inversion than in previous episodes of monetary tightening (2000 or 2006). On the other hand, these worries have not stopped the Fed from hiking rates just yet. Thus we continue to expect the Fed to hike its policy rate by 25 basis points (bp) on 26 September. We also expect that the 3% resistance level will continue to be a hurdle for the 10-year US Treasury yield. For now, it seems likely that the 10-year yield will remain range-bound between 2.80% and 3%. A similar situation is seen in the eurozone, where 10-year Bund yields are moving sideways (since May) within a bandwidth of 0.30% and 0.50%. Recently, 10-year Bund yields increased towards a level of around 0.40%.

In emerging markets, where investors are focusing their attention on specific countries such as Turkey, Argentina, South Africa and Brazil, we think that contagion to other emerging market countries should be limited. Even though Brazilian courts have so far ruled out the possibility of the imprisoned former president Lula taking part as candidate in the presidential elections in October (not our base case either), investors fear that public opinion could override this decision. Such concerns certainly could rekindle spread volatility in emerging markets. It is, however, important to acknowledge that this is a Brazil-specific situation with no obvious links to countries like Indonesia, Poland or other emerging countries for that matter.

After failed trade talks between the Chinese and US administration, the risk of the trade war further escalating early in September has increased. This could hurt market sentiment, which is already mixed. On the other hand, the US has now reached a trade deal with Mexico (and a deal with Canada could follow soon), which shows trade wars can still be prevented. Relief among investors translated into lower spreads over the last couple of days. In our view, this confirms that emerging market debt remains an attractive asset class.