Market action in the past week has been driven to a large extent by heightened concerns over US-China trade negotiations, an extended rise in crude oil prices, and surging bond yields that indicate persistently increasing interest rate expectations.
US-China Trade Worries
Conflicting reports with respect to the ongoing trade talks between China and the US have weighed on equity markets this past week. On Thursday, US President Trump expressed doubt over the potential success of trade negotiations with China, leading US stocks to pull back in response. Then, on Friday, a Chinese Foreign Ministry representative dispelled prior reports that China has offered to cut its trade surplus with the US by $200 billion. This denial helped weigh further on equity markets.
Crude Oil Highs
For much of the past week, crude oil prices have risen further to establish new multi-year highs, as the US West Texas Intermediate benchmark hit a high above 72.00 on Thursday, and Brent crude reached a Thursday peak above 80.00. Crude oil’s recent upward momentum has been helped along by President Trump’s announced US withdrawal from the Iran nuclear deal during the previous week. In addition, the past two consecutive weeks have seen significantly larger than expected draws in US crude oil inventories, which have helped to highlight a lower-than-expected supply situation and support higher oil prices. This has also provided a boost to the energy-correlated Canadian dollar.
Surging Bond Yields
Though they pulled back on Friday, US government bond yields also rose sharply for much of this past week. The benchmark 10-year US Treasury yield peaked above 3.12% on Thursday, marking its highest point since mid-2011. This surge in yields resulted in a strong and continued boost for the US dollar while further pressuring gold prices.
Light Impact from Economic Data
Aside from the major market themes noted above, key economic events in a relatively light stretch of scheduled releases during the past week had only a limited impact on markets. UK wage growth was slightly below expectations while unemployment claims were higher than expected. US retail sales numbers were modestly weaker than expected, but that weakness was offset by upward revisions for the previous month. Australian employment was mixed, with a marginally greater number of jobs created than anticipated, but a slightly higher unemployment rate. From Canada, the CPI inflation reading was in-line with expectations, while Canadian retail sales numbers were mixed, easily beating on the headline data but missing substantially on the core reading (excluding autos).
The Week Ahead – Central Bank Minutes and UK Data
The week ahead promises to be nearly as light in terms of major scheduled data releases as the past week. The most important events will include Wednesday’s release of minutes from the Fed’s last FOMC meeting and Thursday’s release of minutes from the last ECB meeting. Aside from these key releases, UK data will be in focus, with inflation report hearings on Tuesday, CPI on Wednesday, retail sales on Thursday, and GDP quarterly estimate on Friday. In addition, New Zealand retail sales will be released on Monday, eurozone services and manufacturing data on Wednesday, and US durable goods orders on Friday. As noted, however, markets should continue to be focused heavily in the week ahead on the progress of US-China trade talks, crude oil prices, and government bond yields.