UNITED KINGDOM
UK Election ends in hung parliament !
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British Prime Minister Theresa May has called an early election in order to strengthen her hand in negotiations for Brexit. However, Theresa May’s Conservative party has lost its majority in an early election on Thursday in England and a hung parliament has been confirmed in the General Election. In other words, no party has an overall majority, so there is no clear prediction of who will form Britain’s next government.
May has told the Queen she has the numbers to form government and will provide Brexit and anti-terror certainty. She added that what the country needs now more than ever is certainty.
Pound is under pressure!
A hung parliament created uncertainty(markets hate uncertainty) and pound hit seven-week low against the dollar on hung parliament surprise.
Benefit from the fall in the pound!
On the other side, the FTSE 100 surged higher on weaker pound and reached the biggest one-day gain since April 24th. Meanwhile, the FTSE 250, which involves more UK-focused companies, recovered from early losses and finished 0.1% higher at 19,770.
FTSE 100 posted best day in 7 weeks !
How did UK stocks fare under former prime ministers?
Source: https://www.theguardian.com/politics/ng-interactive/2017/jun/08/live-uk-election-results-in-full-2017?CMP=share_btn_tw
The pound was also weaker against the euro during this week.
British economy grew strongly at the end of 2016, but sign of weakness emerged in 2017 because of Brexit uncertainty and its effect on household spending. Therefore, UK economy may slow in 2017.
Wait and See!
The UK government 10 year bond yields have been outperforming (very low) in recent weeks. It seems that uncertainty is good for bond markets. Gilts have rallied as increased political uncertainty in the short term.
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The pound is surely driven by politics inside!
As you can see from the table below, the relationship between US dollar index(DXY) and USD/GBP has a very weak positive correlation in the last month. (while GBP/USD has a negative weak correlation)
GBP/USD AND US DOLLAR INDEX(DXY) RELATIONSHIP
UK trade deficit narrowed in April as imports fell on mechanical machinery, oil and gas.
UK industrial output rose less than expected in April. UK construction output fell the most since 2013, but UK construction new orders rose 3.7% in Q1.
US
US dollar strengthened against the pound and euro during Comey Testimony.(James Comey, who is the FBI director, was fired by US president Trump because of his efforts to investigate the new administration over ties to Russia. Comey Testimony pushed more investors into safe haven assets, such as US treasuries and Yen. In the end, his testimony was not enough to impeach US president Donald Trump, so markets weren’t affected by Comey testimony. US stocks and bond yields rose after Comey statement and US stocks ended mixed amid technology stocks sell-off during this week.
The Chicago Board Options Exchange(CBOE) Volatility Index, US fear index VIX, held at historically low levels and suggested market certainty in spite of global uncertainty is still high. (Movements of the VIX are largely dependent on market reactions).
Meanwhile, Dow Jones hit record highs again.
FED
The Federal Reserve(FED) is expected to increase the interest rates next Wednesday.
Waiting for the hike rates by Fed!
However, the difference in yield between 2 and 10 year Treasury notes dropped on Tuesday to an eight-month low after reports that China is one of the largest holders of US government debt, pressuring lending shares and highlighting the deterioration of the reflation trade. A flat yield curve is an indication investors and traders are worried about the macroeconomic outlook.
US yield curve measure flattens to new 8-month low!
Source: https://www.ft.com/content/d4b195c8-14d5-35fb-96ed-4a0df6ff8d8a
EMERGING MARKETS
Moody’s downgraded on June 9th, 2017 its sovereign credit rating for South Africa to Baa3 from Baa2 with a negative outlook on growth worries.
South Africa’s GDP growth rate is the lowest, compared with fragile other 4 countries. (such as, Indonesia, Brazil, India and Turkey).
Brazil equities dipped 0.9% amid political uncertainty !
Major losers on Friday were Natura (-7.7%), Suzano (-4.0%), and Santander Brazil (-3.4%). Among other stock markets in America, Argentina’s MERVAL lost 315 points or 1.4 percent to 21614. Chile’s IPSA dipped 13 points or 0.3 percent to 4846. Contrastingly, Canada’s TSX gained 50 points or 0.3 percent to 15473. Mexico’s IPC and Colombia’s COLCAP closed flattish.
The Brazilian real fell by 1%, as the selloff across the US tech sector and emerging markets enlarged an uncertain political climate in South America’s largest economy. During the week, the World Bank reduced to 0.3% Brazil’s GDP estimate for 2017.
Source: Trading Economics
Brazil inflation rate fell to 10-year low of 3.6%. Brazil central bank continues rate cuts amid political uncertainty and low inflation.
Mexican peso hit 30-week high!
The currency has lately been nudged by better economic data, less uncertainty coming from US trade policy.
On the other hand, Mexico industrial output fell the most since 2009.
EURO ZONE
Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and the EU28 during the first quarter of 2017, compared with the previous quarter. In other words, economic growth in the Euro Area is getting stronger.
In the first quarter of 2017, Romania (+1.7%), Latvia (+1.6%), Slovenia (+1.5%) and Lithuania (+1.4%) recorded the highest growth compared with the previous quarter, while the United Kingdom (+0.2%) recorded the lowest growth.
Source: Eurostat
The EU28 unemployment rate was 7.8% in April 2017, down from 7.9% in March 2017 and from 8.7% in April 2016. This is the lowest rate recorded in the EU28 since December 2008.
The lowest unemployment rates in April 2017 were recorded in the Czech Republic (3.2%), Germany (3.9%) and Malta (4.1%). The highest unemployment rates were observed in Greece (23.2% in February 2017) and Spain (17.8%).
Moreover, Euro area annual inflation is expected to be 1.4% in May 2017, down from 1.9% in April 2017. These figures are published by Eurostat, the statistical office of the European Union.
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European Central Bank(ECB) closed door on more interest rate cuts and kept interest rates unchanged on Thursday, but warned of weak inflation. ECB’s goal is to achieve an inflation rate of under 2% that can be maintained over the medium term without monetary support.
ITALY (special report)
Italy has been gaining from a weak euro and stronger-than-expected economic growth in Europe, with exports jumping by 14.5 % from the previous year to an all-time high of €42.4 billion in March.
Italy’s inflation picked up to a four-year high of 1.9 % more than estimated in April, and core inflation, which excludes volatile items such as energy, unprocessed food and tobacco, rose to 1.1 %, the highest since the end of 2013.
In May, both the index of consumer and business confidence worsened in Italy.
Italy debt burden has been steady rising since 2007 and reached a record high of 132.6 % of GDP in 2016, the second-highest in the Eurozone. On the positive side, the fiscal deficit has shrunk to 2.4 % of GDP in 2016 from 2015’s 2.7 percent, well below the upper limit of 3 percent set by the EU.
The balance sheets of Italian banks have been benefiting from the economic recovery, which has brought households and firms’ default rates down close to pre-crisis levels. Still, banks are exposed to significant risks, as profits remain low. On June 1st, the European Commission announced that it reached an agreement with Italy’s government on a rescue of Monte dei Paschi di Siena, the country’s oldest bank. Also, Banca Popolare di Vicenza and Veneto Banca have requested for a state bailout, and are waiting for the approval of European authorities.
Source: Trading Economics
Banking stocks in Italy have continued to rally. Italian bonds outperformed other European yields after ECB cut its forecasts for inflation. In addition to this, italian bonds have rallied over the last few weeks as concerns over an early election in Italy and recorded biggest weekly fall of 2017 during this week.
Finally, German trade surplus reached the smallest in 3 months. It still ranks as the world’s 3rd highest recorded balance of trade.
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European stocks closed higher after UK election result .
DAX
JAPAN
Japan GDP growth revised down to 1% as an unexpected decline in oil inventories. Bank of Japan(BOJ)’s Kuroda said that it is still far to go to reach 2% inflation target.
Yen hit 7-week highs on concerns ECB, UK pre-election and US yields rally.
CENTRAL BANKS
Next week, the most important event is the Fed monetary policy decision. The Bank of England and the Bank of Japan are expected to leave monetary policy on hold.
Central Banks Balance Sheet
Source: https://www.ft.com/content/c4de73e2-17a1-11e7-9c35-0dd2cb31823a
Performance of major commodities this year
And in a week:
OIL
Oil dropped to the lowest level in 5-weeks as an unexpected surprise in US crude stockpiles, increased concerns on OPEC’s ability to rebalance world crude markets and rising Middle East tensions. (Saudi Arabia, Egypt, the United Arab Emirates and Bahrain cut ties with Qatar on Monday). Meanwhile, Qatar, the country is a member of OPEC, renews commitment to OPEC oil-cutting strategy.
Crude Oil
CDS SPREADS
Lastly, Qatar, Saudi Arabia, Russia, Lebanese and Cyprus 5y Credit Default Swap(CDS) spreads have widened during this week as rising geopolitical risk.
Source: Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit http://www.markit.com/cds
Source: Eurostat
Zeynep Özde Kurter 
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