Last week was tough for the majority of global equity markets, as nerves over trade tariffs and emerging-market vulnerability weighed on investor sentiment. With investors in risk-off mode, we saw profit taking in the US technology juggernauts, which only unsettled sentiment further.
There was no shortage of explanations for equities’ lacklustre performance across the board last week: Trade tariffs, concern over emerging markets, fresh controversy surrounding the US White House, Brexit and the spectre of rising populism ahead of the Swedish election all weighed on sentiment.
We sensed a risk-off tone among investors with so-called “safe havens” outperforming, and names that have performed well have seen some profit-taking. Nowhere was that more evident than in the tech names in the United States.
Trade concerns continue
After a quiet start to the week thanks to the US Labor Day holiday, investor sentiment quickly turned negative as markets awaited the next trade-tariff development.
The US government had been expected to give an update after a public consultation period on further tariffs ended on September 6. However, there was no announcement last week. Media reports suggest it could take weeks for the US authorities to decide whether to add a 25% tariff on a further US$200 billion of Chinese imports.
Late on Friday of last week, US President Donald Trump said the new tariffs could come soon, “depending on what happens”. He added that tariffs on a further US$267 billion of goods could be put in place.
The uncertainty around the tariffs ate away at investor sentiment. Asian markets in particular suffered from the concerns around the issue.
Emerging-market considerations
Emerging-market sentiment has been affected in recent weeks as both Turkey and Argentina have suffered from some extreme volatility.
Last week saw South Africa (surprisingly) fall into recession, as it gross-domestic-product (GDP) growth fell into the red.
Argentina remained in focus as the government announced fresh austerity measures. Furthermore, tension between Russia and the United States over the Syrian conflict heightened last week.
With that, the MSCI Emerging Market (EM) Index1 briefly fell into bear-market territory. Meanwhile, in Turkey there was the suggestion of some constructive action from the central bank, which suggested it could adjust its monetary policy in response to the situation. This was in the face of inflation data which came in above 17% last week.
US macro data was strong throughout last week. This culminated in Friday’s monthly employment report, which showed wages jumping 0.4% in August.
In our view, those figures should leave the US Federal Reserve feeling very comfortable with its current interest-rate hiking path. Current expectations are for another two hikes this year (likely in September and December) and three more next year.
In response to the wage news, the US dollar strengthened, bringing further pain to emerging markets.
Tech unwind in focus
The tech sector had a challenging week last week, with the Nasdaq Composite Index having its worst September start since 2008.3 Testimony to Congress from the leaders of two prominent tech companies prompted a lot of chatter about overbought conditions and led to some de-risking in the higher-profile names.
Donald Trump ensured the sector remained in focus during the week after he alluded, in a tweet, to the possible impact of trade tariffs on tech-product prices.
Sentiment around Italy improves
Italian equities outperformed all other major indexes in Europe last week as attention on the country’s latest budget intensified.
Markets are already positioning themselves for the publication of the budget, which is due by September 27.
After one credit rating agency downgraded the outlook of the country’s debt, Italy’s deputy Prime Minister Luigi Di Maio said that the Italian government would put the needs of Italians over any rating agency.
Meanwhile, the country’s Finance Minister Giovanni Tria reiterated his intention to create a credible fiscal policy and manage the debt/GDP ratio downwards.
Italian equities spiked on Wednesaday after Di Maio said the forthcoming budget would ensure accounts are kept “in order” and would reassure financial markets.
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