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Market Wrap 18/05/2018

By: Thomas Barry


Equity markets this week were subdued by resurgent political issues. The S&P 500 ended the week mostly flat, down 8 points or 0.3%. North Korea threatened to pull out of historic denuclearisation negotiations after the U.S. conducted military drills with South Korea. Trade war tensions also flared up again as Japan informed the World Trade Organization that it was considering imposing retaliatory tariffs on US imports. Mixed messages came out of China, as U.S. trade negotiators reported China was willing to reduce the trade deficit by $200bn. Later, the Chinese foreign ministry shot those reports down. Additionally, rising bond yields on the back of strong economic data kept stock returns subdued.

The ASX 200 ended down 29 points, or 0.5%, this week. The key news for many investors was Telstra’s profit downgrade which saw the stock fall 11% this week. The question is whether Telstra can continue to compete in an ultracompetitive telco industry surrounded by Optus, Vodafone, TPG, and without a compelling fixed-line business now that NBN Co controls that part of the market.


Brent Crude oil touched US$80/bbl this week before settling at US$78.50, rising 1.8%. Oil prices have now had the longest string of weekly gains since 2011. These gains have been led by production cuts from key OPEC oil-producing members, Iranian sanctions, and Venezuelan supply concerns. On the other hand, aluminium and copper prices fell to US$2,270 and US$6,855 per tonne on the back of increasing supply and the prospects of slowing global growth.


The U.S. dollar rose against most of the major currencies this week as rising treasury yields attracted inflows. The USD has risen 4.4% in the past five weeks to its highest level in more than 20 weeks. Political uncertainty in Italy brought the Euro down to US$1.17, declining every day this week. In Australia, the AUD held mostly steady at US$0.75 on mixed economic data.


This week represented a big move for U.S. bond yields as the benchmark 10-year treasury remained comfortably above 3%, ending the week at 3.06%. U.S. yields at one point touched 3.11% – the highest in 7 years. European yields were marked by a 35 basis point increase in Italian bond yields with clashes between the newly formed government and the European Union to be likely.

Other Assets:

Hedge funds have been very active in currency markets this week. Hedge funds are now taking a bullish stance on the U.S. dollar as net short positions reached their lowest since last June. This has meant a reversal from long positions in emerging market currencies. Meanwhile, their short positions in the Australian dollar have tripled in the last week, likely implying a belief that the RBA will struggle to raise rates anytime soon.

Sources: The Australian Financial Review, Bloomberg, CNN, Reuters

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