Weekly Market Update: Italian risks rising

Tue 29 May 2018

Read our full Market Update Week 21

Market Update

Global equity markets were mixed last week, down in local terms -0.4%, although up in Sterling terms +0.8% due to the Pound falling as UK inflation data fell to a 13-month low, denting the chances of a rate hike in the near term. Equities in general were negatively affected by President Trump’s comments that he was ‘not satisfied’ with the progress of trade talks with China. In Sterling terms US equities led the way, up +1.6%, although in local terms gained only +0.3%. Emerging Markets also had a strong week after recent poor performance, gaining +1.2%, although the local return was flat. UK equities saw greater losses than most, down -0.6%. They have performed very strongly in recent weeks partly on the back of rallying Oil, however the commodity was down -4.7% last week. European markets also suffered, down -0.8% in Sterling terms, while Japanese equities were down -0.1%. US 10Y Treasuries fell back through 3%, closing the week at 2.931%, so that Global Bonds returned +1.7%. UK 10Y Gilt yields also fell from 1.500% to 1.322%. In US Dollar terms Gold gained +0.7% and Metals were flat.

CIO Analysis

Risks around the Italian election flared up again, after the Italian President intervened in the formation of a new populist government, causing a constitutional crisis which could send Italians back to the polls as early as August. The election is now likely to become a referendum on the Euro. Markets were not happy, with CDS spreads and bond yields rising as the Euro plunged. While not systemic yet, the crisis is reminiscent of the original Euro crisis and could quickly escalate. Risks are perhaps greater now that global central banks, unlike in 2012, are in tightening mode. The new Federal Reserve Board has made it clear that they are less vigilant about global developments than their predecessors, so we wouldn’t expect a hold on US interest rate rises on account of global risks. However, before worrying about their allocations in Europe, investors should look towards Mario Draghi, arguably the one person that can diffuse the situation. Investors are expecting the ECB Chair to reiterate his “whatever it takes” pledge, in which case risks should recede. If central banks remain silent, however, we could be looking at a volatile summer for financial markets.

David Baker, CIO