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  • Most global stock markets fell over last week on the back of the political crisis around President Trump. Sentiment towards stocks was further hit by the untimely corruption allegations surrounding Brazilian President Michel Temer. Defensive bonds did well against this back-drop as did safe-haven assets such as gold. The focus is likely to remain on geopolitics this week with Trump’s tour to the Middle East as well as the OPEC meeting on Thursday.

    Last week

    Stock markets sold off.

    Bond markets had a good week.

    “Fear” measures picked up.

    UK inflation rose whilst unemployment hit a 42 year low.

    President Trump came under pressure.

    Brazilian stocks had a big sell-off.

    This week

    OPEC meet on Thursday where they’re expected to announce if they’re planning to extend production cuts beyond June 30th – indications have been that they will keep cuts in place through to the first quarter of next year.

    President Trump’s Middle East tour will likely factor heavily as will his first budget on Tuesday where he’s expected to propose $200 billion in infrastructure spending over 10 years.

    There’s a slew of Brazilian economic data which should keep the spotlight on Michel Temer and the Brazilian financial markets.

    Eurozone sentiment data (Composite PMIs) – the market will be keen to see if the positive trend continues.

    Last Week's Highlights

    Equity markets fell last week on the back of the political crisis around President Trump. Although US shares only dropped 0.3% over the week, the 1.8% drop on Wednesday constituted the biggest drop since September last year. Brazilian stocks were down 13.5% over the week as allegations surfaced around President Temer amidst calls for his impeachment. This dragged emerging market stocks down 1.8% for the week; making them the worst performing region globally.

    Bond markets had a good week, with UK and US government securities doing well as yields moved in over the week. They were up 0.3% and 0.5% respectively. Emerging market bonds were one notable soft spot, being dragged down by Brazil which has a 10% weighting in the index. This dragged the index down 1% for the week.

    The market fear gauge, or “VIX Index” jumped massively last week by 46.4% on Wednesday to 15.59 as the market reacted to allegations about the Trump presidency’s ties with Russia. Whilst this was a big jump, it’s worth re-iterating what we’ve been saying for some time; that the VIX is currently at extremely low levels. The first quarter of this year was the 2nd lowest average reading on record (in 27 years of data) with the lowest reading ever being in late 2006; just before the onset of the financial crisis. Hence why to us a low VIX is a sign of complacency and not a positive barometer for market health.

    Heavy week for UK data, with Inflation, Wages and Retail Sales. Inflation data came out higher than expected with CPI coming in at 2.7%; the highest level in four years, with RPI at 3.5%. We expect the rate of inflation to keep drifting up but don’t expect the bank of England to raise rates to combat it. Inflation will likely drop again towards the end of the year as the currency effects wash out. Unemployment came in at 4.6%; a 42 year low but real wages fell 0.2% (their first drop in 3 years). Finally, to complete the mixed bag of data, retail sales jumped 2.3% in April (their biggest rise in over a year). A good signal, but one that will likely wane in the face of falling real wages.

    Brazilian stocks got pounded on Thursday, dropping 16.5% in GBP on the day. This fall came in the wake of allegations of corruption surrounding President Temer. It is alleged that there are tapes of Michel Temer endorsing bribe payments to a parliamentary ally. Temer has strongly denied the allegations, but with an approval rating of just 9%, he badly needs a swift and positive resolution.

    President Trump had a bad week, with a story leaking last week that he had revealed highly classified information in a White House meeting last week to both the Russian foreign minister and ambassador. This was then quickly followed by a second story suggesting that the President had attempted to get former FBI Director James Comey to end the FBI’s investigation into former Trump aide and national security advisor Michael Flynn. This prompted the Justice Department to appoint Robert Mueller as a special counsel to investigate claims about Russian links to the Trump administration.

    Asset Returns

    Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

    Brazilian stocks pounded as corruption scandals surrounding President Temer emerged


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