European stocks edged down on Friday, while U.S. stocks notched gains despite posting a slight loss on the week as investors faced the reality of a second coronavirus wave in Europe and the uncertainty around further stimulus in the U.S.
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Investors' risk appetite eased slightly on Friday as the day's US macro data supported a more hawkish Fed, right after Powell had hinted at a slower pace of Fed cuts on Thursday. The US economy remains strong: retail sales rose in October and the NY Empire Manufacturing survey surprised to the upside, while October import prices also surprised to the upside.
Financial markets started the week with subdued trading and no relevant macroeconomic data releases. Government bond yields fell slightly in the US and rose in the eurozone, with curves flattening and peripheral spreads flat. Several ECB officials highlighted yesterday their concerns about Trump's protectionist plans impact on growth rather than inflation.
Investors traded on a cautious note in the first session of the week. U.S. stocks advanced across the board (including the tech-heavy Nasdaq, which had been lagging in the last sessions) while European indices were mixed. In fixed-income markets, yields on U.S. and euro area core sovereign bonds were roughly unchanged.
The spread of new COVID-19 cases weakened investor's sentiment in the last session of August. Stock indices declined in most advanced and emerging economies except for the heavy technology-weighted Nasdaq index, in the US, and the Japanese Nikkei.
In yesterday's session investors traded cautiously as they digested political developments. On the one hand, tensions between the US and China rose as the White House gave China 72 hours to close its consulate in Houston amid accusations of spying. China has said it intends to retaliate.
Investor sentiment ended the week on the up amid positive reports over a potential antiviral drug to treat COVID-19. As risk appetite rose, stocks increased across Europe and the U.S., the USD weakened and commodity prices advanced (in oil markets, the barrel of Brent closed moderately above $43).
Investor sentiment diverged on both sides of the Atlantic yesterday. In the Eurozone, government bond yields were mixed, with French spreads widening after the European Commission endorsed the French draft budget for 2025, which aims to reduce public deficit from 6.1% of GDP to 5%. The budget has yet to be approved in parliament amid a political stalemate.
Political tensions in France took center stage during yesterday's session after far-right and far-left parties submitted no-confidence motions against Prime Minister Barnier, risking the collapse of the current government. French government yields rose, its risk premium widened further, and the euro sold-off to 1.05 against the dollar.
Investors traded cautiously ahead of today's FOMC decision (a 25bp interest rate cut is widely discounted) and the BoE on Thursday (expected to hold interest rates at 4.75%). On the macro data front, US retail sales rose 0.6% m/m in November, and in Germany, the IFO expectations index surprised to the downside as confidence in the country continued to weaken.
Markets traded in risk-off mode during Friday's session, with heightened volatility, as investors reacted to the latest social media announcement by the US President regarding its trade agenda. Trump threatened to impose a 50% tariff on the EU and a 25% levy on Apple if the company refused to relocate its manufacturing to the US.
Friday's session was mixed as investors continued to weigh tariff uncertainty, monetary policy decisions and the Fed's updated macro forecasts. Sovereign bond yields edged lower on both sides of the Atlantic, while stock markets registered losses in the euro area and Asia, and barely advanced in the US. The dollar was mostly flat.
US President Trump announced a 90-day pause on the so-called “reciprocal" tariffs for all targeted countries, but still maintained the 10% general tariff rate and raised the tariff rate for China to 125% after both countries’ authorities escalated the tension. US stocks rallied and the S&P had its largest intraday gain in over 17 years (+9.5%).
Sentiment recovered in financial markets following news that, over the weekend, President Trump exempted smartphones, computers and other electronics from the reciprocal tariffs announced on April 2nd (the 10% baseline tariff and additional tariffs to a list of other countries).
After the risk-off session of Monday, triggered by the depreciation of the Chinese yuan above the 7 yuans per US dollar threshold, financial markets' volatility moderated and stock indices edged down in Europe and rose in the US.
Yesterday's announcement of a temporary truce in the trade war between the US and China lifted investors' mood, particularly in US assets. Both countries agreed that for the next 90 days the US will reduce the tariffs it imposed on Chinese imports last month from 145% to 30%, and that Chinese tariffs on US imports will fall from 125% to 10%.
Concerns over the US fiscal stance and debt burden—intensified by recent credit rating downgrades and ongoing tax bill negotiations in Washington—weighed on US financial assets. US Treasury yields rose, particularly on the longer end of the curve, while US stocks fell by more than 1.5%. The US dollar weakened, trading around 1.13 against the euro.
With U.S. markets closed for the Memorial Day holiday, European stocks advanced moderately at the start of the week as investors digested the results of the weekend's European Parliament election.
Financial markets' tone improved for the second day in a row on the back of previous Fed comments saying that it would support the economy in case the scenario worsens, mixed economic data releases and brighter investor expectations on trade tensions between Mexico and the U.S.
Investors started the week in a cautious mood as they eye the upcoming G20 summit at the end of this week, in which Presidents Trump and Xi Jinping are expected to meet and discuss the possibility of resuming trade talks.