RECAP: For the week ending May 19th, 2017

May 19, 2017

Midweek tumble partially reversed by Friday rallyStocks closed lower after a highly volatile week that saw a Friday rally partially compensate for a steep sell-off on Wednesday. The large-cap S&P 500 Index and the S&P MidCap 400 Index fared better than the other major benchmarks. After reaching its lowest level in over two decades the previous week, the Chicago Board of Exchange’s Volatility Index (VIX) spiked by almost half on Wednesday. Other markets were also notably volatile, with the dollar reaching its lowest level relative to the euro since October, while the price of gold rose sharply.

On Wednesday, the Dow and the S&P 500 fell the most since September, while the Nasdaq tumbled the most since the Brexit vote in June. The declines followed allegations the previous evening that President Trump had requested ex-FBI Director James Comey to drop his investigation into possible ties between former Trump campaign officials and the Russian government. Most observers agreed that the deepening controversy threatened to undermine the Trump administration’s efforts on tax reform and other market-friendly policies.

The pan-European Stoxx 600 benchmark was down about 1% for the week as political turmoil in Washington weighed on equity performance and offset an eighth consecutive week of strong cash flows into European stocks. Local indexes in Germany and France also lost ground, although the UK’s FTSE 100 Index held on to small gains after reaching an all-time high earlier in the week.

Eurozone economic data were mostly positive for the week, although traders said it generally met expectations and did little to drive market movements. The eurozone recorded 1.7% annual growth through March. The only notable weak spot in the data involved Greece, which slipped back into recession as its economy shrank for the second straight quarter.

Japanese stocks declined for the week, as President Trump’s domestic political woes prompted a broad global equity market sell-off on Wednesday. For the week ending Friday, May 19, the Nikkei 225 Stock Average fell about 1.5%(293.14 points) and closed at 19,590.76. For the year to date, the Nikkei is up about 2.5%, the broad-based TOPIX Index is ahead about 2.7%, and the TOPIX Small Index has advanced 6.3%.

The yen strengthened versus the U.S. dollar, as investors favoured the yen’s safe-haven status during Wednesday’s global downdraft and ended the week around ¥111.5 per dollar versus about ¥117 per dollar at the end of 2016. While a stronger yen versus the dollar helps the total return performance of Japanese stocks in dollar terms, a stronger yen hurts the prospects for Japanese exporters—a key element of the country’s economy.

China’s latest monthly economic indicators signaled slower growth in April following a stronger-than-expected first quarter. Readings of value-added industrial output and retail sales both slowed in April from March and came in weaker than forecast, according to data from China’s statistics bureau. Meanwhile, fixed-asset investment excluding rural areas—a gauge of money spent to buy and build machinery, buildings, and other taxed facilities—grew at a slower-than-expected pace in the first four months of 2017. Taken together, April’s data signaled that China’s economy lost momentum following the surprisingly strong 6.9%growth pace in the first quarter. Additionally, the data supported analysts’ views that economic conditions in China appear to have peaked early this year and will likely moderate in the second half.

On Wednesday, one of Brazil’s leading media outlets reported that it had obtained recordings of President Michel Temer allegedly condoning bribes from the owner of a meatpacking conglomerate to win the silence of former House Speaker Eduardo Cunha, who was a potential witness in the ongoing investigation into the country’s huge government corruption scandal. Most observers had believed that Temer has not been involved in the bribery of government officials, so the news came as a shock. Temer replaced Dilma Rousseff, who was herself ensnared in the scandal and removed from office. Temer’s government had implemented investor-friendly reforms and is in the process of trying to enact pension reforms, the fate of which has now become somewhat uncertain.

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