Instreet Market & Economic Insights
Investors took to safe assets last week in response to the US missile strikes on a Syrian air base. It was a predictable response, with the Japanese Yen, gold, and highly-rated government bonds initially rallying as stock markets dropped.
The decision by Trump to carry out the air strike raises questions about his wider foreign policy intentions, as he has previously signalled a desire to pull out of conflicts in the middle east.
Investor fears subsided quickly, even as participants digested what at first glance appeared to be disappointing non-farm payroll data out of the US. 98,000 jobs were created last month, which fell far short of forecasts.
Personally, I am not too concerned about the health of the US labour market. Employment gains in recent months have been strong due to unusually mild weather conditions. Now, as temperatures have normalised and snowstorms hit parts of the country, there has been a pullback.
Further, the March report showed that the US jobless rate has edged down to 4.5 per cent from 4.7 per cent. This is the lowest level in almost 10 years and it is now below what is considered full employment in the US.
I believe a US interest rate rise remains on the table for June even with the weaker than expected job report.
Investors turn to Europe
Interestingly, US stock funds experienced their largest withdrawals in more than 18 months as investors extended their rotation into cheaper valued European equities. The latest weekly flow data from EPFR shows that investors drained $14.5 billion from US stock portfolios in the week to April 5, as they shifted out of US equities.
Investors have embraced Europe’s growth prospects as well as the lower stock valuations across the continent, looking past risks posed by the French elections and Brexit. Funds invested in western European stocks enjoyed their largest two-week inflows in more than a year.
Surprisingly, in an increasing interest rate environment, and the US Federal Reserve beginning to talk about normalising their balance sheet, as well as the recent comments from the European Central Bank - investors have committed more than $12 billion to global bond funds.
An update on oil
The Syrian missile strikes also had an impact on the oil market last week, with Brent jumping more than 2 per cent to a one-month high above $56 a barrel as investors worried about supply disruptions. It later settled to $55.24, but was still 4.6 per cent higher for the week.
During the last couple of weeks, oil prices have been rebounding after slumping by about 10 per cent at the start of March. The earlier weakness was driven by investor concerns that the OPEC deal to cut production would not be enough to bring stocks back down to their five-year average.
Inventories of petroleum products continue to fall in the US and stocks of crude oil are getting close to peaking. That said, a sustained drawdown in crude stocks will probably be necessary before oil prices can climb much above current levels.
Economic news out of China and Europe has helped boost estimates for growth in oil demand this year. In my view, strong growth in oil demand should rebalance the market, drawdown stocks and push up oil prices. The risk is that US shale production continues to grow strongly due to higher prices and increasing supply.
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