Asian markets had a mixed performance last week, with several markets focusing more on domestic issues, and the rising Treasury yields and stronger U.S. dollar having mixed impacts across the region. That strong U.S. dollar was most beneficial to the Nikkei in Japan, which led the region as it added 1.6% for the week. Mainland China’s Shanghai Composite also finished the week with a 1.0% gain, boosted mid-week by news that the MSCI was adding 234 Chinese A-shares to its Asia-Pacific index. The rest of the region was more subdued, with Hong Kong’s Hang Seng pulling back by 0.2% after the previous week’s stellar performance. Australia also saw a 0.3% decline as it ended the week on poor footing. South Korea’s Kospi was the worst performer in the region, falling 0.7%, as it appeared North Korea was pulling back from denuclearization.
The coming week should see more strength for the Nikkei, as it looks like the U.S. dollar is going to continue firming against rivals. U.S. economic data continues supporting a faster cycle of rate hikes, which is boosting Treasury yields and the U.S. dollar. While this will help Japan, it will be a drag on Hong Kong, as the island nation has struggled to maintain its peg to the U.S. dollar. Australia could see a boost from the stronger dollar as well, unless this serves to depress industrial commodity prices. South Korea could continue to lag, as tensions look to re-ignite with North Korea.
European markets were little changed throughout most of the previous week, scoring small gains and losses, except for Thursday, when a seeming breakthrough for Italian politics sent markets across Europe broadly higher. That one day allowed the major indices to score weekly gains, with the pan-European Stoxx Europe 600 and Germany’s DAX both advancing 0.6% for the week, while the French CAC 40 outperformed, as it added 1.3%. London’s FTSE also finished the week 0.7% higher after stringing together a three session winning streak.
The coming week will start off slow in Europe, with many markets across the region closed for a public holiday on Monday and little economic data due on Tuesday. Wednesday will likely see increased action, as countries across the European Union report their PMI data, which will be closely watched by investors to see if it could give the ECB a reason to slow their quantitative easing program. The U.S. dollar could continue to play heavily on European markets as well, since a stronger U.S. dollar is bullish for European and British multi-nationals, and roughly 70% of the FTSE is comprised of multi-nationals that rise when the Pound softens.
U.S. markets fell in three of the five weekly sessions and posted weekly losses as well, with rising Treasury yields and worries over trade negotiations with China driving market action. The S&P 500 and Dow Industrials both finished the week 0.5% lower, while the Nasdaq dropped 0.7%. On a brighter note, the Russell 2000 posted a 1.3% gain for the week, as small cap stocks have taken the lead in the markets. Analysts have speculated that the small cap strength is due to the more domestic and regional focus of small companies, as well as a lack of impact from the stronger U.S. dollar and rising Treasury yields. Markets fell in the final two sessions of the week, as investors were on edge over the Washington meeting of U.S. and Chinese officials to negotiate trade tariffs.
The coming week could get off to either a good start or a rocky start, depending on what news comes from the U.S. / China negotiations. Either way, the Russell 2000 could be a good bet to outperform, as there is unlikely to be anything that changes the fundamental argument for buying small cap stocks currently. The Russell 2000 has seen gains in 11 of the past 14 sessions, and we don’t see that ending in the coming week.
Gold finished the week with a small gain, but it wasn’t nearly enough, as the yellow metal posted a 2.2% weekly decline. It was the worst weekly performance for gold since the week ending December 8, 2017, and gold remains very close to its lowest level of 2018. The continued strength of the U.S. dollar and rising U.S. Treasury yields were the weight pulling gold below $1,300 an ounce last week, and it doesn’t look like markets are going to get a break from that weight in the coming week. This could cause gold to look for support lower at the $1,270 level in the coming week.
Crude continued to show strength last week, with the U.S. benchmark West Texas Intermediate contract posting a 0.7% gain, while Brent crude, the global benchmark, advanced 3% and nearly topped $80 a barrel as a closing level. This was the third consecutive weekly advance for crude, but it does look like gains are slowing as traders weigh the rising U.S. production levels against the potential for supply disruptions in Iran. Monday’s OPEC-JMMC meetings could set the tone for trade in the coming week in the crude pits.
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