Global markets observe high volatility and turbulence
It was a turbulent week for global financial markets, with inversion in the US yield curve coupled with trade-related worries and weak economic data from major countries dented the appeal of risky assets.
- Stocks recovered towards the end of a turbulent week
- US yield curve and trade war remain in investor focus
- China’s industrial production rose at its slowest pace since January 2002
- Germany’s economy shrank 0.1% in the second quarter
- The dollar is mixed against major counterparts
- Crude oil prices marginally higher on the week
It was a turbulent week for global financial markets, with inversion in the US yield curve coupled with trade-related worries and weak economic data from major countries dented the appeal of risky assets. The slowdown in China’s economy was highlighted by a rise in industrial production at its slowest pace since January 2002, with production increased 4.8% in July versus a 6.3% increase in the previous month.
At the end of the week, the Shanghai composite rose 0.29% to 2,823.82, Hong Kong’s Hang Seng index added 0.85%, In Japan, the Nikkei 225 recovered from an earlier dip and finished the trading day marginally higher at 20,418.81, while the Topix index closed 0.1% higher at 1,485.29. South Korea’s Kospi slipped 0.58% to 1,927.17, while Australia’s S&P/ASX 200 ended its trading day just below the flatline at 6,405.50.
U.S. stocks recovered towards the end of the week as investors got some relief from speculation that European authorities could bolster stimulus if growth in the Eurozone continues to slow. Meanwhile, Treasuries slipped lower, lifting yields from multiyear lows.
Earlier, US Treasury yields fell sharply after a series of weak economic data from China and Germany underlined a slowdown in global growth. The 10-year Treasury note yield plunged 8.2 basis points to 1.596%, its lowest since September 2016, the 2-year note rate slipped 7.5 basis points to 1.592%, while the 30-year bond yield tumbled 9.3 basis points to 2.038%, an all-time low. Risk aversion intensified after the spread between the 2-year note and the 10-year note fell to a negative 1 basis point as investors see inversion as a sign of an impending recession.
On Friday, the S&P 500 rose 1.4%, the Dow climbed 1.2% and the Nasdaq grew 1.7%. But all the three indices finished with a third-straight weekly decline, with the US-China trade war and bond yields remain in focus.
The greenback was mixed against major rivals, with EURUSD slipped to weekly lows around 1.1066 after failed attempts to stay above 1.12. Germany’s economy shrank 0.1% in the second quarter, in another sign that the US-China trade war hit global manufacturing supply chains and the country’s export-oriented industries. Signals of a looming recession in the Europe’s largest economy dented the appeal of the common currency which remains depressed and continues to threat the lows around 1.1025. The decline marked a sharp swing from the 0.4% growth it recorded in the first quarter of 2019. As a result, the German economy grew by 0.4% in the year to June, its slowest pace in six years.
USDJPY managed to stage a rebound after two weeks of losses. The pair registered weekly highs just below the 107.00 figure as investors continues to be cautious amid trade uncertainty. As the recovery in the risk sentiment gathered steam in the second half of the week, the yen demand has cooled. In part, the pair was rising due to the receding recession fears in the US after strong retail sales data. Retail sales rose 0.7% last month, after a 0.3% gain in June. Sales rose an even stronger 0.9% if auto dealers and gasoline stations are omitted.
Brent rose marginally on Friday and managed to close the week on a slightly positive note. However, the futures failed to finish above $59, which points to lingering uncertainty over US-China trade deal, global oil demand and the state of the global economy. Meanwhile, in its monthly report, the Organization of the Petroleum Exporting Countries lowered its forecast for world oil-demand growth in 2019 by 40,000 barrels a day to 1.1 million barrels. The 2020 forecast remained unchanged at 1.14 million barrels a day. OPEC also cut its outlook for non-OPEC supply growth in 2019 and 2020. In other news, Baker Hughes on Friday reported a rise in the active US oil-rig count for the first time in 7 weeks, up 6 at 770 this week.
Technically, Brent remains vulnerable to further losses as long as the prices stay below the $60 handle, with the bigger picture shows that the upside potential will likely be limited in the medium term, as traders continue to express demand concerns, especially as the US and China struggle to make progress in their trade talks. In the short term, a relief rally in global equities spurred by improved US bond yields could cap the bearish pressure in the oil market.