RECAP: For the week ending May 26th, 2017

May 28, 2017

Canadian stocks were marginally lower, but U.S. large-cap stocks posted gains of nearly 1.5% on the week, setting new record highs while shrugging off Washington concerns (which prompted the one-day selloff last week). Investors focused on corporate earnings results, the latest commentary from the U.S. Federal Reserve, and an announcement that OPEC is extending production cuts in an effort to support oil prices. With more than 90% of companies in the S&P reporting earnings for the first quarter, economic data will likely be at the forefront of investors’ minds. Fittingly, the coming week is packed with prominent economic reports, including GDP growth for the first quarter on Wednesday and May’s U.S. jobs report on Friday.

Fed officials also discussed their intention to gradually reduce reinvestment of payments on the central bank’s holdings of Treasury bonds and mortgage-backed securities, which may put upward pressure on longer-term interest rates. With such a change still months away, however, longer-term Treasury yields were largely range-bound for the week on light volumes. News on Friday that the U.S. economy had expanded a bit more than originally anticipated in the first quarter failed to move yields as investors seemed to ignore the backward-looking data. Municipal bonds advanced, supported by strong demand that outpaced new issuance.

European stocks ended the week flat to lower, weighed down by energy, automobile, and financial shares. Oil prices dropped following OPEC’s meeting, and oil shares retreated through the end of the week. Automobile stocks came under pressure from the ever-expanding emissions probes and President Trump’s comments that Germany was “very bad” because of its trade surplus with the U.S. Germany’s export-heavy index, the DAX 30, fell following reports of Trump’s statement. The pan-European Stoxx 600 Index also ended the week lower.

The composite purchasing managers’ index (PMI) for the eurozone remained at a six-year high, according to data firm IHS Markit, buttressing how cheaper oil and easier credit is helping to stimulate the region. Germany also reported strong manufacturing sector growth, and the PMI for France rose to its highest level in six years. The strong German and French PMIs and the all-time high in the German Business Climate Index were influential market drivers early in the week.

Japanese stocks edged higher for the week, helped by some favorable domestic economic data. Volatility was relatively low ahead of Wednesday’s release of minutes from the Federal Reserve’s monetary policy meeting in May. Investors hoped to find clear signals about possible Fed rate hikes later this year, which could affect the U.S. dollar’s strength versus the yen. As Japan is a major oil importer, investors also awaited the results of Thursday’s meeting of oil-producing countries regarding the extension of production cuts.

Moody’s Investors Service cut its credit rating on China for the first time since 1989 last week, becoming the latest global organization to raise alarm about the dangers of China’s fast-growing debt load. Moody’s lowered its rating on China’s sovereign debt by a notch to A1 from Aa3, a decision that leaves its assessment of China’s creditworthiness on the same level as Japan, Saudi Arabia, and Israel. It also changed its outlook for China to stable from negative. “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” the agency said. Though reform progress will likely transform China’s economy and financial system over time, “it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” Moody’s added. Hours after announcing the China downgrade, Moody’s also lowered its credit rating on Hong Kong and changed its outlook for the city to stable from negative.

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