Market Update

This week, the ongoing trade tensions between the US and China remained the central focus for market watchers. Although there were a few minor positive developments, such as the temporary easing of some planned Huawei trade restrictions by the US and China's willingness to continue trade talks, the current impasse is expected to persist for several more months or even years, especially given President Donald Trump's apparent satisfaction with the situation.
In this context, close attention continues to be paid to economic data releases, as they contribute to the economic outlook risks, providing further reasons for the current loose monetary policy and economic stimulus to persist.
The minutes from the last Federal Reserve monetary policy meeting on May 1, 2019, released on May 22, were somewhat disappointing. The policymakers indicated that their patient approach to US interest rate changes would remain "appropriate for some time," and they reiterated their belief that the recent weakness in CPI inflation is temporary. While the minutes had a mildly hawkish tone, there is a prevailing belief that US interest rates have already peaked, and it's likely that the Fed will start cutting rates in the near future, especially given soft CPI inflation readings and the escalation in trade tensions since the Fed's last meeting. St. Louis Fed President James Bullard even stated this week that the Fed might have "overdone it" with the interest rate increase last December.
Similarly, the weaker-than-expected UK inflation reading this week, with core CPI remaining unchanged at 1.8%, continues to challenge the Bank of England's insistence on the necessity of higher UK interest rates.
In the UK, Brexit remained in the spotlight due to Theresa May's unsuccessful attempt to present a new Brexit deal proposal, which was followed by her announcement of resignation on Friday, May 24, 2019. While the outcome of the European elections won't be known until Sunday night (May 26, 2019), the focus has shifted to the upcoming Tory leadership election. The likelihood of a no-deal Brexit has increased, as the next leader will need the support of Conservative Party members, and given the probable success of Nigel Farage's Brexit Party, a moderate leader is unlikely. Candidates like Boris Johnson or other hard-Brexit proponents, such as Dominic Raab, are more likely to succeed Theresa May.
Despite the uncertainty, the FTSE-100 fell by just under 1%, but it was supported by a slight weakening in the pound, which dropped from $1.2731 to $1.2714. A weaker pound benefits the FTSE-100, boosting returns for exporters and the value of overseas earnings.
Meanwhile, India's BSE Sensex 30 emerged as one of the best-performing equity markets during the week, following the re-election of Narendra Modi as Prime Minister.
Looking ahead to the coming week, market participants will be closely watching the Fed's preferred inflation gauge, the PCE, and the second reading of US Q1 GDP.