Market Comment | Risk-off mood returned at the end of the week

  • Cautious mood in financial markets during the week amid escalating China-US trade tensions following the chain of announcements of new tariffs on both sides. All these measures seemed to point to an all-out trade war and hampered risk assets during the week. Furthermore, increasing geopolitical uncertainty on other fronts, mainly in Turkey, also weighed on the performance of financial markets during the week.
  • Against this backdrop, markets showed a risk-off movement at the end of the week, mainly driven by idiosyncratic factors in Turkey, with mild contagion to the rest of the EMs. Safe-haven bonds attracted new flows: the US 10Y Treasury and the 10Y Bund yields declined sharply.
  • Most equity indices suffered from the increasing risks in the global outlook, with some exceptions: Chinese equities recovered this week, despite escalating trade tensions with the US and favoured by the release of positive macroeconomic data (FX reserves and exports) which also helped to maintain a degree of stability of the CNY during the week. Developed equity indices showed a poor performance during this week: European markets underperformed clearly in the final part of the week, dragged down by the banking sector, while US stock indices ended with small losses, as the release of positive corporate earnings weighed.
  • Turkish assets sharply underperformed during the week as the political tension between US and Turkey added more pressure to current economic imbalances. The TRY continued under high pressure, and renewed its historically lowest levels against the USD, despite the adjustment to central bank reserve policy early this week. Today’s threat by the US to impose new sanctions hampered Turkish assets further.
  • The USD appreciated across the board, except against the JPY, both mainly favoured by safe-haven flows. The EUR depreciated against the USD and ended the week below 1.15 USD/EUR as Turkey’s situation weighed. The GBP underperformed and stood at the lowest level in one year amid concerns about the Brexit negotiations.
  • EM currencies were down: The RUB and TRY suffered the most this week, the former after the US announced new sanctions and the latter amid idiosyncratic factors, and with some spillover to other EM currencies at the end of the week. The fall in commodity prices also weighed on some Latam currencies.
  • The US administration imposed sanctions on Iran after leaving the nuclear dealwhich had avoided the trade blockade during Obama`s term. Consequently oil prices registered high volatility during the week: in the early part of the week they increased sharply, but as the week went by, oil stockpile data dragged down oil prices, which ended the week below 73 USD per barrel.

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