Weekly market update : The trade war is back in the spotlight

Friday August  2

Weekly market update

Financial markets were heavily disrupted this week, in a context of renewed Sino-American trade tensions. Traders had initially taken some profit, disappointed by the Fed's 25 basis point cut in key rates and a less accommodating speech by J. Powell. This was intensified after D. Trump announced the entry into force on September 1 of a 10% tax on Chinese imports not yet taxed.

Indexes Over the past week, red has dominated for the different geographical areas. In Asia, the Nikkei lost 2.6%, the Shanghai Composite 2.6% and the Hang Seng dropped by 5.2%. In Europe, the CAC40 lost 3.7% over the week, the Dax 3.9% and the Foostie. For the peripheral countries of the euro zone, Portugal is down by 4.6%, Spain fell 3.6% and Italy by 3.3%. In the United States, at the time of writing, the Dow Jones reported a weekly loss of 3.2%. The S&500 is falling back by 3.6% as a sign of a return of risk aversion (see VIX graph). The Nasdaq100 yields 4.5%. The VIX finds a more stressful area, but is still far from historical peaks

Commodities Oil prices ended the week down, weighed down by the renewed trade tensions and their consequences on crude oil demand. Oil also had one of its worst sessions in 5 years, dropping up to 7.9% in a single day. Brent is trading near USD 61.6 while WTI is trading around USD 54.8. Gold and silver diverge on the weekly sequence. The grey metal took a breather following its strong appreciation in July and thus consolidated close to USD 16. On the gold side, the metal remains supported by the easing of the Fed's monetary policy and the return of risk aversion on the equity markets. Gold therefore naturally continues its upward trajectory at USD 1440 per ounce. The industrial metals segment fell sharply over the week, weighed down by the rise of the US dollar. Copper lost ground at USD 5876, as did aluminum and tin at USD 1757 and USD 17275 respectively.

Equities markets A Japanese company in the spotlight It is called Advantest Corporation and has been listed on the Tokyo Stock Exchange since 1983. The company was founded by Mr. Takeda in 1954, with the first name of Takeda Riken industries to market the microampere meter. In 1977, the company contributed to the launch of a Japanese satellite by providing high-end measuring instruments. In the 1980s, the company changed its name to Advantest Corporation. It becomes the world's leading supplier of semiconductor test equipment. To increase its notoriety, the group also entered the NYSE. The title achieves exploits in 2019, with the strongest increase of the Nikkei and its 91% performance, including 30% on the last week after its results. Its capitalization, despite the upward trend, amounts to just over USD 7 billion, which places it in the average capitalization of the Japanese index, a level below the lowest CAC40 value (Atos and its USD 9 billion capitalization). Advantest Corporation

Bond market Investors were not surprised by the 0.25% drop in the Fed rate. Instead, they were waiting to hear J. Powell's assessment of the economic outlook. As a result, yields are falling again for all sovereign debt. The stress on international trade amplifies the "flight to quality" movement. In Europe, the Bund traded on a basis of -0.48% and the French OAT on a new record of 0.21%. Negative rates are spreading. Sweden (-0.19%), the Netherlands (-0.37%) generate yields below the symbolic zero. Switzerland also has a historical reference of -0.85%. The same behavior of European bonds, the Italian 10-year rate falls to 1.58% and that of Spain to 0.27%, while bond investors can invest in Greek sovereign securities at 2%. In the United States, the interest rate on US 10-year debt fell to its lowest level since November 2016 to 1.89%.

Forex market Volatility is reappearing ostentatiously on the currency market. The week therefore saw traders working nervously on different pairs. The spreads are evident on the British pound. Penalized by growing fears of a no-deal Brexit, the British currency lost more than 2% against its main counterparts, i.e. USD 1.21 (see graph) and CHF 1.20. A no-deal Brexit is seen as a disaster by the business community, which fears economic turbulence. For its part, the euro is once again losing ground against the greenback by trading below USD 1.11. Speakers favored the yen, which strengthened against a basket of currencies. Indeed, the BoJ's status quo on its base rate at -0.10% and the maintenance of its 0% target for 10-year government bonds boosted the Japanese currency. Nor has the institution changed the stance of its future monetary policy. The yen rose against the dollar to JPY 108.55 and JPY 118.5 against the single currency. Over the next few sessions, it is important to monitor the behavior of emerging currencies that are falling sharply against the greenback, such as the Brazilian real, the Argentine peso, the renminbi, the rupee and the ruble. GBP/USD evolution The parity is close to its historical lows of 1984

Economic data The various macroeconomic statistics show a certain divergence. First of all, with regards to prices, inflation figures in the United States came out in line with the "core PCE" which fell to 0.2%, or 1.6% over one year. In Germany, the price index for German consumers rose by 1.7% year-on-year in July after +1.6% in June. In terms of confidence, the index calculated by the Conference Board rose by more than 10 points to 135.7 points in July from 124.3 in June. It's getting more complicated for industrial activity indices. Indeed, for the 3rd consecutive month, activity in the Chinese manufacturing sector contracted. In July, the PMI stood at 49.7 points, below 50 and showing a contraction. In the United States, it is also slowing down. The manufacturing ISM fell 0.5 points to 51.2 in July from 51.7 in June. On the Fed's side, the Fed lowered its key interest rate for the first time in 10 years by 0.25% to 2.25%, a move widely expected by the financial community. As for unemployment, it stands at 3.7% in the United States, with 164K jobs created outside agriculture and an hourly wage up by 0.3%.

The trade war is back in the spotlight The Fed's meeting was supposed to be the catalyst for a calm summer phase, but Donald Trump's unpredictable comments on strengthening protectionism are steering markets into a completely different and uncomfortable level of stress. Most of the indices were at historical highs and the US announcement fell into a context of significant overbought, generating a powerful negative reaction. Trade tensions had been relegated to the background by the half-year corporate results and speeches of central bankers. Now, more than ever, it poses a threat to the global economy, despite attempts to reach an agreement between the countries concerned. Favored by a never-ending era of bonds with zero yield, equities are the only field where performance can materialize (the qualitative first half of 2019 confirms this) but we must accept the risk, in a disrupted environment that increasingly advocates protectionism.