Weekly Market Update

Author : Laura Hochstetler
Date : November 17, 2018

Market Action

Global equities closed mostly lower for the week amid continued concerns over slowing global economic growth and the chaotic Brexit process playing out between the United Kingdom and the European Union. The yield on the US 10-year Treasury note declined 11 basis points from a week ago to 3.07%, while volatility, as measured by the CBOE Volatility Index (VIX), rose to 20.8 from 18 last Friday.

The price of a barrel of West Texas Intermediate (WTI) crude oil fell to its lowest level in nearly a year, a month after reaching a one-year high. WTI spiked above $76 in early October, pressured by supply fears ahead of the looming re-imposition of US trade sanctions on Iran. However, an increase in US shale oil inventories overwhelmed the curbs on Iranian crude, sending prices tumbling nearly $20 over the last 6 weeks. Oil futures declined for a record 12 consecutive days before ending that streak on Wednesday amid reports of deeper-than-expected OPEC production cuts.

Economic growth declined in Japan and Germany during the third quarter. In Japan, a series of natural disasters struck during the period as third quarter economic growth declined at a 1.2% annual rate. The decline is expected to be temporary, with a Q4 bounce back expected. Germany posted a 0.2% quarter-over-quarter decline, owing in part to bottlenecks caused by new auto emissions standards. A bounce back is expected in Germany as well, though the European economy has been losing momentum for much of 2018 as the pace of global trade has slowed this year. While US growth has been quite robust so far this year, concerns are mounting as to whether it can withstand a deeper global soft patch.

Argentina’s Senate approved the government’s austere budget proposal for 2019, granting President Macri a legislative victory and sending a signal to the IMF that his administration is serious about steep spending cuts. Following a plunge in the peso earlier this year, which undermined market confidence, Macri negotiated a $57.1B bailout from the fund, calming markets but displeasing many voters already upset over earlier budget reductions.

The Italian government refused to meet demands from the EU to reduce its 2019 budget deficit or risk being fined under the EU’s excessive deficit procedure. However, the government said safeguards would be taken to make sure the deficit does not exceed 2.4% of GDP if economic growth does not meet its optimistic projections. Italy is trying to revive economic growth, blaming years of EU-imposed austerity for the country’s lack of economic progress.

Japan’s central bank has become the first among G7 nations to own assets collectively worth more than the country’s annual economic output, with its holdings reaching ¥553.6T ($4.9T). Assets started ballooning when Governor Haruhiko Kuroda took the BOJ helm in early 2013, hoping that such steps would boost Japanese inflation to 2% in two years. That target has proved elusive, barring a brief increase in prices after a sales tax hike in 2014.

Click here for this week’s updated market returns table.

What could affect markets in the week ahead?

UK Prime Minister Theresa May’s long-awaited Brexit deal triggered a wave of ministerial resignations that has rocked her government and financial markets and raised chances of a snap election. Traders who had hung back from big sterling bets for much of 2018 rushed to sell it, fueling its biggest daily drop against the euro since 2016. Gilt yields tumbled too and the FTSE index, which usually rises when sterling falls, lost that inverse correlation and closed flat after Thursday’s mayhem. One-month implied volatility on sterling -a gauge of how much traders expect it to swing in a given period – has climbed to over 15 percent. Not only is that double the volatility of the euro and almost triple yen and Swiss franc levels, it has now entered territory reserved for emerging currencies such as the Brazilian real and Turkish lira. May might now need to survive a no-confidence vote, possibly on Tuesday. Even if she does, she has her work cut out to get the unpopular deal through parliament next month.

India’s financial markets are on edge as the government and the central bank prepare for what could be an acrimonious RBI board meeting on November 19. Tensions have been simmering between the government and the RBI for months, contributing to heavy bond market outflows and making the rupee the worst performing major Asian currency this year. Concerns are rising also regarding India’s shadow banking system. Will India experience a Lehman day?

Chinese officials have been sending conciliatory signals on trade to US negotiators in advance of a planned meeting between US president Donald Trump and China’s Xi Jinping late this month on the sidelines of the G20 conference in Buenos Ares. China is believed to be considering making concessions to the US on intellectual property protections, opening markets in some key sectors and increasing purchases of some US goods, such as soybeans. Few see a comprehensive trade agreement being stuck when the leaders meet, but there is hope that a short-term ceasefire can be achieved while negotiations over thorny issues, such as China’s subsidies to favored industries, are hashed out.

This Week from BlackSummit

Victor (as in Frankenstein), Prometheus (and Pandora), and Sisyphus (and the Rock): Defiance, Derivatives, and Midas
John E. Charalambakis

Video of the Week

Dad keeps toddler calm, sings during Camp Fire escape

Image of the Week

This year, stock market investors are favoring companies with strong balance sheets. Credit investors, on the other hand, have done just the opposite.