Oil prices continues its downtrend and fell to new lows this year
27 June 2017
The week was relatively light with few macro data released and no major events, as central banks are behind us.
Crude oil was the first market driver this week and weighs on global market sentiment. Oil prices remained under pressure and fell to new lows.
On a YTD basis, oil prices are down 20% as oversupply concern remains. This is the biggest price drop in the first half of the year since 1997.
We need to monitor closely this point because if downtrend deepens, it might be a major concern with potential impacts on all asset classes and central banks, and could weigh on growth forecast and global macro outlook. At time of writing, we still view this dip as temporary.
Brexit talks with the European Union began this week. David Davis (U.K. Brexit secretary) outlined hopes for a " strong and special partnership " with the European Union once Britain leaves the union. That’s probably a step in the right direction. Theresa May is in a precarious position following the election disaster.
We think that it is not impossible to see a shift in market sentiment towards a more softer Brexit in the coming months, but we don’t forget that negotiations are just at the beginning and uncertainty should remain in United Kingdom.
Looking towards the Chinese market, MSCI announced the inclusion of China A-Shares to its MSCI EM Index. It will be done incrementally, in a two-step procedure, following reviews in May-2018 and then August-2018 and will represent 0.7% weight in the MSCI EM Index. It is a long-awaited decision, so we do not expect significant implications or impacts on the market.
In Europe, the main focus was on preliminary June PMI release. Euro zone June flash composite PMI came in softer than expected and falls to 55.7 from 56.8 in the previous month. The services PMI slowed this month and came in at 54.7, below expectations. The manufacturing activity hit a 6-year high, and rose to 57.3 from 57.0 in May. This is the highest reading since April 2011.
Despite this dip, this report remains robust, as the average expansion in the second quarter has been the strongest for over six years with a broad based recovery.
Moreover, ECB published its economic bulletin this week and confirmed that inflation is likely to remain around recent levels in the coming months.
In United States, PMI growth slowed as well. The United States June Flash Composite PMI came in at 53.0 vs 53.6 for the previous month, but subcomponents on employment and new orders remain strong.
Equities markets traded range bound this week with outperformance of EM. Core yields fell slightly.