• Pessimism dominated markets as negative headlines about US-China trade relations continued
• US Economy: Dark trade clouds gather
• UK PM Theresa May announced her resignation
• US-China tension will only escalate, before finding a resolution

Global markets returned to a pessimistic mood last week, focusing on negative headlines about US-China trade relations. Oil prices fell sharply on the week, as rising inventories in the US had markets worried that trade uncertainty is dampening demand. Measures of manufacturing confidence across various regions were also weak. Manufacturing activity in Europe and Japan continued to contract. In the US, the Markit gauge of manufacturing confidence also showed a further deterioration in May.

To top it all off the Brexit saga came back to the fore, as Prime Minister Theresa May announced her resignation. May had been unable to get her negotiated Brexit deal through parliament. The way forward on Brexit remains unclear, and the new Conservative leader, who should be selected by the end of July, will not have a lot of time to chart a new course before the Oct 31st deadline for Britain to leave the EU. In the meantime, the cloud of uncertainty continues to hang over the UK economy, and the increased probability of a no-deal Brexit has weighed heavily on the pound over the past week.

US Economy: Dark trade clouds gather

Dark clouds continued to gather over the once-promising trade discussions between the US and China. Increasingly stark dialogue sent financial markets into a tizzy, an indication that there is a wider gap between the two parties than many observers had initially thought. Trade headwinds are likely playing a role in weakness out of the factory sector. Durable goods orders fell 2.1% during April. Orders have been influenced by volatile aircraft orders in recent months, and this was again the case. That said, the weakness in orders extends beyond commercial aircraft. Core capex orders also slipped 0.9% mom, and have slowed to 2.5% yoy. Overall, manufacturing activity should continue to be subdued in coming months amid heightened trade frictions and sluggish global growth.

On a brighter note, lower mortgage rates have helped stymie the sharp pullback in home sales seen last year but have not reversed it. Declines in both new and existing home sales during April mask an overall improving trend in the housing market. New home sales came in below expectations, falling 6.9% in April. However, the report contained significant revisions to prior months’ data, which showed sales reached a cycle-high 723,000-unit pace during March. Furthermore, the 673,000-unit sales pace hit in April was the fourth strongest since 2007. Existing home sales also posted a drop and fell 0.4% during the month. While underwhelming, existing sales remain fairly solid and are running just slightly below their year-ago pace. A significant breakout is unlikely this year, but sales should be stronger than they have been the past few months.

Source: BIMB Securities Research - 27 May 2019