Continued uncertainties surrounding the Italian Government and the prospect of an increase in trade tariffs led to a roller coaster week for equity prices. The S&P 500 did manage to claw its way back into positive territory after some strong jobs data on Friday. Stocks in Europe did also manage to recover some, but not all the earlier weeks losses by the end of the week. Italian and German bond spreads did tighten at the end of the week as Italy appointed a new prime minister and the new coalition government was finally sworn into power. Ten-year US Treasury yields, which had fallen in response to investors looking for safe havens earlier in the week, did rise post the employment data but remain below the 3% reached recently.
Investors, took the news that the unemployment rate had fallen to an 18 year low as a positive sign that the US economy remains robust. Rather than focus on the possibility that this could further encourage the Federal Reserve to be more aggressive with tightening policy. St Louis Fed Chairman Bullard this week expressed the view that the Federal Reserve should stop raising interest rates. He believes whilst inflation expectations remain low there is no further need to raise interest rates.
The ongoing uncertainties surrounding Italy, Spain, trade wars and US interest rates continue to ensure investor sentiment remains below the euphoric levels it appeared to reach earlier in the year. The Vix index fell modestly on the week, but at 13.5 remains well above the historic lows of last year.
Looking to the week ahead, as usual, the monthly Purchasing Manager Surveys will be released over the coming days. The UK will publish the Markit PMI’s for both construction and services sector. Expectations are for a small pickup from the 52 reading last month. A further dip closer to 50, which is considered to be the mark between expansion and contraction, will add further concerns as to the strength or otherwise of the UK economy.
With the ongoing concerns around trade wars, April’s US trade balance, released on Wednesday, will probably draw some commentary. May, as we know is the month we should sell and go away. Equity prices in the US managed to build on the gains made in April, likewise modestly in the UK possibly helped by the continued weakness in sterling. European equity markets overall did not fare so well in May as a reaction to the political uncertainty, as it gave back some of Aprils gains.