Weekly Global Market update (June 5th – June 9th)

June 12, 2017

Canadian stocks were marginally higher, U.S. large-cap stocks were mixed, and small-cap stocks rose by more than 1% in a week where divergences in sector performance and political news drove market sentiment. Helping small-cap stocks’ relative performance, compared with their large-cap counterparts, was both their greater exposure to the financial services sector, which outperformed as long-term Treasury yields rose, and their relatively small exposure to the technology sector, which lagged. Small-cap stocks recorded most of their outperformance following the testimony of former U.S. FBI Director James Comey Thursday morning, and they continued their rally even after the United Kingdom’s general election results showed that Theresa May’s party fell short of gaining the majority in Britain’s Parliament.

The major benchmarks ended mixed for the week. Friday brought about an abrupt change in market dynamics, as market-leading stocks such as Amazon, Facebook, and Apple sold off, while a rally early in the day helped the smaller-cap benchmarks outperform and manage to join the other indexes in record territory. Nevertheless, small-caps continued to lag substantially for the year to date, with much of the market’s gains so far in 2017 concentrated in the giant, technology-related shares that are especially heavily weighted in the Nasdaq Composite Index—a function of leading firms seizing market share in a slowly growing economy.

Trading activity was light for much of the week, with a number of notable domestic and foreign political developments—including rising tensions in the Persian Gulf and former FBI Director James Comey’s highly anticipated Senate testimony—failing to drive significant market moves. Markets rose at the start of trading Friday following the surprise UK election results the previous evening, but most observers agreed that the rally had little to do with—and probably occurred in spite of—the election outcome. The diminishing focus on political events was also evidenced by the decline Friday of the Chicago Board of Exchange’s Volatility Index (VIX), or so-called fear index, to multi-decade lows.

 In the investment-grade corporate bond market, buyers seemed to focus on the banking and technology/media and telecommunications sectors, while real estate investment trusts and retail issues underperformed. The energy sector remained resilient despite the move lower in oil prices due to weak demand numbers. For the most part, rates have been the main driver of market sentiment over the last few trading sessions. There was a notable lack of risk appetite, and volumes dropped ahead of Comey’s testimony.

Markets had a subdued opening to the week, as most of the macro and political news was slated for Thursday and Friday. This included the UK election, in which the ruling Conservative Party lost its parliamentary majority; the European Central Bank, which lowered its inflation forecasts and closed the door on more interest rate cuts; and Comey’s testimony in the U.S. European equity markets moved higher on Friday following Thursday’s UK election, as the outcome may have improved prospects for a so-called soft Brexit. 

Japanese equities have generally moved in sync with the strength (or weakness) of the yen. The Nikkei 225 Stock Average retreated from its 12-month high and declined 0.8% (164 points) for the week, closing at 20,013.26. For the year to date, the Nikkei is up 4.7%, the broad-based TOPIX Index is ahead 4.8%, and the TOPIX Small Index has gained 8.6%. The yen was little changed versus the U.S. dollar and ended the week near ¥110 per dollar, which is about 5.6% stronger than ¥117 per U.S. dollar at the end of 2016.

Qatar’s financial markets came under pressure this week after four Arab states—Saudi Arabia, Egypt, the United Arab Emirates, and Bahrain—cut diplomatic ties and transport links to the a country, accusing it of supporting terrorism and extremism. Qatar is the world’s largest exporter of liquefied natural gas (LNG) and is home to the U.S. military command in the region. The country’s stocks and bonds both came under pressure throughout the week, and the forward contracts on the Qatari riyal, which is pegged to the U.S. dollar, indicate increased expectations that Qatar will devalue its currency. S&P Global Ratings downgraded its long-term rating on Qatar to AA- from AA and said it is keeping the country on CreditWatch negative, which means that it could downgrade Qatar again in the near future. Fitch Ratings did not change its AA/Stable sovereign rating but said “if the dispute persists, the economic and financial implications for Qatar would be more serious, but any potential rating impact would depend on several factors including Qatar’s policy response and the maintenance of broad domestic political stability.

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