US flat to higher on vaccine headlines; Europe steady; Asia off on China news

United States

Equities were flat to higher Friday with defensive sectors leading as markets saw progress on Covid-19 vaccines but confronted rising US-China worries. The Dow industrial index was flat (down 0.037 percent), the S&P 500 rose 0.2 percent, and the NASDAQ was up 0.4 percent.

On the positive side were comments from top US health adviser Anthony Fauci about Moderna's preliminary vaccine trial. Also positive were more reports about the big push to secure a vaccine soon, with AstraZeneca's vaccine also reportedly showing progress. On the negative side for markets was the China story after China moved to limit Hong Kong's independence, and the US and China traded barbs over the pandemic, trade conflicts, and other disputes.

Among stock sectors, defensive plays including real estate and utilities were the day's best performers, with consumer staples also outperforming, led by food stocks and health & personal care. Other gainers included communications, especially internet stocks. On the downside, the energy sector fared worst as oil prices fell on worries about Chinese demand. Financials lagged as banks gave back some of the week's gains. Materials and consumer discretionary shares also underperformed.

Among companies, Nvidia, the gaming chipmaker, rose 2.9 percent after strong quarterly results. Coty, the beauty products company, surged 12.6 percent after launching a new line. On the downside, Ross Stores fell 3.1 percent after an earnings miss and disappointing the market on its plan to reopen its stores. Deere, the heavy equipment company, fell 1.5 percent despite topping expectations on strong sales of farm equipment.

These data reflect observations at 4:00 PM US ET: Dated Brent spot crude oil fell 87 cents to US$35.30 while spot gold rose US$9.78 to US$1,735.10. The US dollar rose against most major currencies but fell vs. the yen. The US Treasury 30-year bond yield fell 1 basis point to 1.37 percent while the 10-year note yield fell 1 basis point to 0.66 percent.

Europe

Equity indexes ended flat Friday as weakness in China-sensitive sectors offset gains elsewhere. The Europe-wide STOXX 600 was unchanged (down 0.03) percent, the German DAX firmed 0.1 percent, the French CAC was unchanged (down 0.02) percent, and the UK FTSE-100 fell 0.4 percent.

Renewed US-China tensions, plus news that China had dropped its annual growth target, hurt oil stocks, miners, luxury, technology, and other sectors with heavy exposure to China. On the positive side, autos outperformed, along with travel & leisure, media, real estate, and construction, with support from the reopening narrative and hopes for progress on a Covid-19 vaccine.

Among companies in focus, Asia-focused banks were hit hard, including HSBC, off 5 percent, and Standard Chartered, off 2.4 percent, while big UK oil companies Royal Dutch Shell, off 0.9 percent, and BP, down 0.6 percent, tracked oil prices lower. In merger news, German real estate companies TAG Immobilien, up 6.6 percent, and LEG Immobilien, up 0.8 percent, gained on news the two were considering a merger.

In economic data, UK retail sales collapsed in April. Following a previously unprecedented and marginally steeper revised 5.2 percent monthly drop in March, volumes fell a record 18.1 percent as many stores were unable to open due to the coronavirus crisis. This was much sharper than expected and left purchases some 22.6 percent short of their level a year ago, also a new all-time low.

Asia Pacific

Major Asian markets sold off heavily Friday in response to news China's government is considering tightening security controls on Hong Kong, with moves on the week mixed. Hong Kong's Hang Seng index plunged 5.6 percent on the day and closed the week down 3.7 percent, while the Shanghai Composite index dropped 1.9 percent both the day and on the week. Japan's Nikkei and Topix indices fell 0.8 percent and 0.9 percent respectively on the day, reducing gains on the week to 1.8 percent and 1.7 percent respectively. Australia's All Ordinaries index also closed down 0.9 percent on the day but outperformed on the week with a gain of 2.1 percent.

Senior Chinese leaders meeting at the annual National People's Congress, which started in Beijing Friday, are considering draft legislation that will extend to Hong Kong national security measure that currently only apply to mainland China. Despite Hong Kong's status as a "special administrative region" with greater local autonomy, civil unrest there over the last twelve months has clearly increased support in Beijing to impose tighter controls. A similar proposal in 2003 was withdrawn after large-scale protests, and the sharp drop in Hong Kong shares Friday likely reflects concerns that this move now may also lead to a renewed escalation in civil unrest.

The meeting of the National People's Congress also included the presentation of the government's economic report from Premier Li Keqiang. Uncertainty about the near-term outlook as the economy recovers from the Covid-19 pandemic has prompted officials to dispense with their normal practice of announcing a target for annual GDP growth. Premier Li, however, told the Congress that the government is aiming for employment growth of around 9 million people this year and to keep inflation around 3.5 percent. He also reaffirmed that policy settings will remain supportive this year, with monetary policy aiming to keep lending rates low and an increase in infrastructure spending expected to help widen the fiscal deficit from around 2.8 percent of GDP in 2019 to around 3.5 percent in 2020.

The Bank of Japan held an unscheduled policy meeting Friday. Although policy rates were left on hold, as they have been since 2016, the main focus of the meeting was to decide upon additional measures to provide funds to financial institutions as part of efforts to offset the economic impact of the pandemic. In addition to previously announced measures worth around Y45 trillion ($240 billion), officials have agreed to provide up to Y30 trillion ($280 billion ) to banks at zero interest for up one year for the purpose of lending these funds to domestic businesses at zero interest and with no collateral. The BoJ will pay a positive interest rate of 0.1 percent on these funds to encourage banks to participate in this program.

Japanese inflation data were also published Friday and showed price pressures weakened significantly in April. Headline inflation fell from 0.4 percent in March to 0.1 percent in April, while Core CPI, which excludes fresh food prices, fell 0.2 percent on the year after increasing 0.4 percent previously. This measure of underlying inflation is in negative territory for the first time since late 2016, with changes in consumer spending patterns associated with the pandemic likely a major factor driving weaker prices in many categories.

The Reserve Bank of India also held an "off-cycle" meeting Friday, bringing forward the meeting scheduled to take place early next month. Officials cut the main policy rate by 40 basis points to 4.0 percent after they cut it by 75 basis points at their late meeting in March. This decision reflects officials' assessment that the impact on economic activity of the pandemic and the national lockdown put in place late March has already been more severe than initially anticipated and is set to continue. In contrast, officials are less concerned about the near-term outlook for inflation and the potential for it to rise above their target range. In addition to cutting rates Friday, the RBI also agreed to maintain an "accommodative" monetary policy stance as long as necessary to revive growth.

New Zealand retail trade sales volumes fell 0.7 percent on the quarter in the three months to March after revisions show growth was flat in the three months to December. This is the biggest quarterly fall in sales volumes in eight years and reflects the impact of travel, social, and business restrictions imposed to curb the domestic spread of Covid-19. Year-on-year growth in sales volumes also moderated from 3.3 percent in the three months to December to 2.3 percent in the three months to March.

Global Stock Market Recap

Global Bond Market Recap

Global Currency Recap

Commodities and currencies

Looking forward

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