Commentary on financial markets – May 2018
Highlights:
- US: unemployment below 4% for the first time in the new millennium
- Italy: threat of early elections
Commentary:
Without a doubt, the most significant driver of equity markets over the past month has been the United States, led by Donald Trump. Positive news from the US includes firstly the drop in unemployment below 4% for the first time since 2000 and then the excellent results of US companies, which grew profits by an average of 25% in Q1.
On the other hand, the United States plays a very active and, for many players, uncertain role in geopolitics and international trade. President Donald Trump first announced the termination of the nuclear agreement with Iran and the renewal of sanctions over Iran’s nuclear programme. The deadline for renewal of the deal expired on 12 May. Iran had expected an influx of foreign investment from the deal, but also noted that it did not intend to resume its nuclear programme if the United States terminated the deal. The European Union has informed that the G8 states will not withdraw from the convention. China has strongly criticised the withdrawal from the agreement. China is also opening a new train link with Tehran and the first cargo train was dispatched in May. The most sensitive reaction to the withdrawal from the nuclear deal has been the price of oil, which continues to rise rapidly.
Another move by US diplomacy was the cancellation of Donald Trump’s planned meeting with North Korean leader Kim Jong-un. World markets took the news negatively and volatility also increased in the short term.
Then, at the end of May, the US Secretary of State confirmed the validity of the steel (25%) and aluminium (10%) tariffs on imports from the EU, Canada and Mexico. Individual countries are gradually announcing what retaliatory measures they are planning. Canada has indicated that it will impose tariffs on US imports totalling USD 12.8 billion. Mexico, on the other hand, will impose tariffs on food and industrial products, which has resulted in a fall in the shares of food companies.
Despite this, US stocks rose in May, as has already been written, mainly due to the excellent performance of US companies and the economy as a whole. In contrast, the results of European companies were rather disappointing, which contributed to the negative trading result in May on European stock markets.
In addition, the post-election negotiations and the efforts to form a coalition of winning parties in Italy fell through with the presidential veto of the Eurosceptic Savona for the post of Finance Minister. The possibility of early elections as early as the end of July is in the air. As a result, Italian bonds are being sold off sharply and investors are looking for safer alternatives, so they are buying US Treasury bonds. This caused the yield on the 10-year to fall by 12 basis points. The Italian banking sector, which is not in good shape, is also suffering. The problems of Italy, a major member of the EU, are thus affecting the European economy as a whole, which has naturally had a negative impact on European share prices.