Morgane Delledonne, ETF Investment Strategist at BMO Global Asset Management writes that last week ETF flows saw a European equity markets’ sell-off, which partly reflected mounting peripheral political uncertainty, 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 per cent and the Italian German 10yr yield spread widened by 88bps last week.”
Delledonne comments that 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).
Delledonne writes: “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 10yr US Treasury yield fell by 7bps to below 3 per cent 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 increases the overnight lending rate by 300bps to 16.5 per cent 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 USD4.4 billion of inflows last week, led by US Equity ETFs (USD5.2 billion). The Eurozone periphery risk-off sentiment resulted in moderate net outflows from Eurozone Equity ETFs, while Japan Equity ETFs recorded the largest net outflows (USD2.1 billion) for the second consecutive week. Fixed Income ETFs attracted USD2.7 billion 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.”
Looking at this week, Delledonne writes that 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 per cent yoy, prior: 0.7 per cent yoy) alongside headline inflation (cons: 1.6 per cent yoy, prior: 1.2 per cent yoy).
“In the US, the second release of Q1 GDP will be published on Wednesday and on Friday (first estimate: 2.3 per cent QoQ) followed by the release of the employment report on Friday. Nonfarm payrolls are expected to increase by 190k from 164k previously and unemployment rate to remain unchanged at 3.9 per cent.
“The Bank of Canada is expected to keep interest rates on hold at 1.25 per cent at its policy meeting on Wednesday.”