By Morgane Delledonne, ETF investment strategist, BMO Global Asset Management.
Morgane Delledonne, ETF investment strategist, BMO Global Asset Management.
Developed equity markets were relatively flat to slightly rising last week, while the US 10y Treasury yield rose to 3.11%, the highest since July 2011, and oil prices climbed to $79.3 per barrel on Thursday.
Emerging equity markets remain under pressure, declining by 2.3% on the week, amid a stronger US dollar (+1.2% on the week) and higher US yields.
In Europe, the euro fell against major currencies and the Italian 10y bond yield climbed 2.3% amid uncertainty after the anti-establishment Five Star Movement and anti-immigration League entered into a coalition agreement seen as a renewed populist risk in the European Union.
The new coalition is proposing tax cuts and increased public spending worrying core EU countries about its ability to respect its commitments on debt (60% of GDP) and deficit (3% of GDP) from the Maastricht Treaty. The two populist parties have also asked for a review of EU treaties, in particular related to the banking union.
According to Bloomberg data, investors poured a net $6 billion into global equity ETFs led by US equity ETFs ($6.3bn), while Japan equity ETFs recorded the largest net outflows (-$1.5bn). There were little outflows from emerging markets ETFs (-$87m) after three consecutive weeks of significant outflows despite a bear equity market.
Fixed income ETFs attracted $2.7bn led by global bond ETFs and a rebound in emerging markets bond ETFs. European ETFs saw net outflows amid rising political risk in Italy which is increasing implied equity volatility and borrowing cost compared to the rest of the eurozone.
Source: BMO GAM.
This week
The Federal Reserve will release the minutes of its May policy meeting. Market participants will likely pay attention to any hints on the FOMC’s tolerance of an inflation overshoot, both in terms of duration and magnitude.
The Fed is expected to hike by another 25bps at the June 12-13 FOMC meeting. The market is currently pricing in three to four hikes this year. Lastly, the minutes may give more details on the FOMC’s rent concern over the risk of inverting the yield curve.
The ECB minutes release on Thursday is unlikely to reveal much about the ECB’s future course of action. Market participants will be closely watching the PMI survey for May after the soft GDP growth reading in the first quarter. The ECB’s President Mario Draghi acknowledged the slowdown in growth in Q1, but remained confident in the convergence of inflation toward the ECB’s target.
UK headline CPI inflation is expected to remain unchanged at 2.5% year-on-year (yoy) in April while core CPI inflation is expected to drop to 2.2% yoy in April from 2.3% in March.
Geopolitics is unlikely to take the centre of the stage this week. The major event is the visit of South Korean President Moon Jae-in to Washington in advance of the US-North Korea summit with Kim Jong Un.
(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)