June 6, 2018
US post positive Jobs Data
US Treasury yields reflected the market sentiment of rising inflation in May 2018. During the month the benchmark 10-year treasury inched above 3.10% before ending the month around 2.86%.
Higher yields indicated that the market anticipated rising inflation. The spread between the 2 year Treasury Note and 10 year Treasury Note stood at around 0.43%, relatively low given historical differences in excess of 2.50%. We expect a mean reversion, leading to a steeper yield curve over the medium term.
The US equity markets posted a positive return in the last month, although equity markets traded with high volatility. The trade war that is erupting between the United States and its trading partners in Europe, Canada and Mexico threaten to further destabilize global markets, both Canada and Mexico have already hit back at the US tariffs on Aluminum and Steel imports. The European Union has also promised retaliation.
On a more positive note, the US economy has posted its lowest unemployment rate in 18 years after American employers added 223,000 jobs in May and were forced to raise wages, a performance that reinforced the longest periods of growth in recent history. Higher growth rate in employment argues well for an increase in consumer spending and rising inflation.
The benchmark Euro Stoxx 50 index closed the last month down 2.73%, political noise in Italy and Spain affected the European market indices. Similar to the Brexit debate, Italians treat the question of their euro membership as either you belong to the EU camp, or you do not. Being in the middle creates confusion as been the case with Brexit. Italy’s past leaders support for European Union policies gave rise to the current nationalist backlash.
Previous Governments accepted European legislation that was profoundly against Italian interests. Italy is viewed as the home of Western Europe’s largest anti-establishment movement, two large outsider parties supported by the votes of millions of Italians pinned in a cycle of persistent high unemployment and poverty.
Spain’s former premier, Prime Minister Mariano Rajoy, confronted a no-confidence vote last month for the first time since the country emerged from the dictatorship of Francisco Franco.
Emerging-markets stocks have been declining lately, driven mainly by the strength of the US dollar. The US dollar remains the single most important consideration for Emerging Markets (EM) economies fiscal imbalance, according to a report from debt-ratings company Fitch. In general, a stronger dollar tends to drive lower stock prices in emerging markets.
From Jan. 24, through May 31, the dollar has risen 5.3%, as measured by the trade-weighted dollar index of major currencies. This has resulted in an increase in local currency terms the external debt commitments for developing countries.
Over the same period, emerging-markets stocks and exchange traders funds exposed to them have fallen. Vanguard FTSE Emerging Markets (VWO) exchange-traded fund, which holds a basket of emerging-markets stocks fell more than 11%. In addition, the JP Morgan Emerging Market Bond (EMB) index has declined by 2.27% since the start of the year, compared with a depreciation of 1.50% of Bloomberg Barclays US Aggregate Bond Total Return USD Corporate Bond Fund.
Trinidad and Tobago’s finance minister estimated a positive 1.5 -1.8% Gross Domestic Product (GDP) growth for 2018, this is a reversal of the prior period GDP decline. While at the same time Moody’s Research on May 22nd, projected 3.5% budget deficit for 2018 highlighting the challenging revenue projections from new taxes. Trinidad’s forecasted GDP for 2018 is little changed from the levels 10 years ago.
The new Government of Barbados (GOB) announced a Debt Restructure Plan on June 1, 2018. Total Public Debt stood at 175% with gross international reserves at only US$ 220 million, equivalent to an import cover ratio of only 7 weeks. The GOB is finalizing an economic reform programme which includes possible balance of payments support from the International Monetary Fund.
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