By Morgane Delledonne, ETF investment strategist, BMO Global Asset Management.
Morgane Delledonne, ETF investment strategist, BMO Global Asset Management.
Last week
European equity markets’ sell-off partly reflected mounting peripheral political uncertainty last week, sending the euro to its lowest against the US dollar in nine months. In Italy, President Sergio Mattarella has refused to appoint euro-sceptic candidate, Paolo Savona, as finance minister, and asked for new elections in the fall.
However, the respite was short-lived, as populist leader of the anti-establishment Five Star Movement said it would consider the impeachment of the president, while his League counterpart reiterated his intentions to leave the EU unless the governing rules are relaxed.
Italian equities declined by 4.5% and the Italian German 10 year yield spread widened by 88bps last week. Elsewhere in the eurozone periphery, Spain’s opposition Socialist leader has asked for a vote of confidence in Prime Minister Rajoy’s leadership (centre-right) on Friday after corruption scandals in his party, and has called for a snap election in fall also supported by the Liberal party (Ciudadanos).
In the US, the minutes of the May FOMC meeting reaffirmed that Fed officials are set to raise interest rates in June, while reassuring on the gradual path of the future increases in interest rates. US equity markets rose and the 10 year US Treasury yield fell by 7bps to below 3% on the day of the release.
In emerging markets, the Turkish Lira recorded its worst performance since 2008 despite the intervention of the Central Bank of Turkey to defend the currency by increasing the overnight lending rate by 300bps to 16.5% last week. The risk-off sentiment in Turkey is driven by the build-up in macroeconomic vulnerabilities, notably the level of dollar-denominated corporate debt.
According to Bloomberg data, global equity ETFs recorded a net $4.4 billion of inflows last week, led by US equity ETFs ($5.2bn). The eurozone periphery risk-off sentiment resulted in moderate net outflows from eurozone equity ETFs, while Japan equity ETFs recorded the largest net outflows ($2.1bn) for the second consecutive week.
Fixed Income ETFs attracted $2.7bn led by US bond ETFs and a rebound in emerging markets bond ETFs. European bond ETFs saw the largest net outflows amid rising political risk in Italy and Spain.
Source: BMO GAM.
This week
UK and US markets were closed on Monday for bank holiday and Memorial Day respectively.
European preliminary inflation for May will be released on Thursday. Core inflation is expected to rebound in May (cons: 1% yoy, prior: 0.7%yoy) alongside headline inflation (cons: 1.6%yoy, prior: 1.2%yoy).
In the US, the second release of Q1 GDP will be published on Wednesday and on Friday (first estimate: 2.3% qoq) followed by the release of the employment report on Friday. Nonfarm payrolls are expected to increase by 190k from 164k previously and the unemployment rate to remain unchanged at 3.9%.
(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)