Weekly Market Update

Author : Laura Hochstetler
Date : December 1, 2018

Market Action

Global equities closed mostly higher for the week, with US equities showing the greatest increase at about 5% on the week. (The S&P 500 Index recorded its best weekly gain since December 2011.) The yield on the US 10-year Treasury declined 4 basis points to 3.0% while the price of a barrel of WTI crude oil edged just below $50. Volatility, as measured by the CBOE Volatility Index (VIX), declined to 18.8 from 21.6 a week ago.

Among the gathering signs of weakening global growth this week was China’s official manufacturing Purchasing Managers’ Index (PMI) dropping to 50 in November, a 28-month low. Meanwhile, Eurozone economic confidence declined for an 11th-straight month, to the lowest level since May 2017, while two countries that are not members of the eurozone, Switzerland and Sweden, reported small contractions in growth in Q3. By contrast, US Q3 GDP growth was unrevised at a 3.5% annual pace.

Minutes of the November meeting of the Fed released last week showed some FOMC members expressed uncertainty over the timing of additional hikes while a few pointed to slowing global growth, the effects of trade policies and US dollar strength as downside risks. Markets have begun to price in fewer rate hikes, with only two additional hikes fully anticipated at present, well below the Fed’s current median forecast for five more. Markets seemed to be boosted by comments from Fed chairman Jerome Powell, who said rates are approaching a range the central bank judges to be neutral for the economy, which investors interpreted as a sign that the tightening cycle may be nearing an end in the next few quarters.

Leaders of the world’s major economies have gathered in Buenos Aires for their annual G20 summit on Friday and Saturday. Meetings on the sidelines of the G20 summit may dominate news coverage of it. President Trump and China’s Xi Jinping are expected to meet regarding trade issues and the two leaders will have a dinner meeting with staff on Saturday evening. The presence of three top crude producers – Saudi Arabia, Russia and the U.S. – have also raised expectations that oil policy will be discussed in Buenos Aires. One meeting that will not be taking place is the one previously scheduled between Russian president Vladimir Putin and President Trump. Trump announced his cancellation of the meeting in reaction to Russia’s seizure of three Ukrainian warships and their crews.

US President Trump said this week that he expects to raise tariffs on $200bn of Chinese goods to 25% (from the current 10%) on Jan. 1. He also stated that he’s ready to apply a further round of levies on $267bn worth of imports, including iPhones and laptops, starting next year. In response, China’s foreign ministry urged the US to work toward a positive outcome of the Saturday meeting between President Trump and Xi Jinping in Buenos Aires.

Last week, the EU once again rejected Italy’s proposed 2019 budget and began an excessive deficit procedure which subjects Italy to fines equaling 0.2% of its GDP. Italy’s leaders said they will stick to their budget plans, vowing to make good on campaign promises of a universal basic income, cutting taxes and lowering the retirement age.

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

What could affect markets in the days ahead?

The EU signed off on the Brexit agreement with the UK on Sunday and now the deal faces ratification by the British Parliament on December 11. If lawmakers do not ratify the pact, the odds of a disorderly Brexit process will increase significantly. An analysis released this week by the Bank of England projects that in the case of an untidy Brexit, the UK economy will contract by 8% in the immediate aftermath. The central bank foresees a nearly 33% decline in house prices, a 48% dive in commercial real estate values and a 25% slump in the value of the pound.

The price of oil will be a focus, along with trade, at this weekend’s G20 summit. US benchmark WTI crude oil prices fell below $50 a barrel this week despite talk of a significant production cut from OPEC plus Russia. Falling oil prices were once a tailwind for the US economy but now that the country is the world’s largest producer, falling prices cut both ways. Big swings in capital expenditures in reaction to the price of oil can impact the overall US economy. Oil production’s geographic concentration can also have a significant impact on state and local economies.

Investors will have another chance to hear Fed chairman Jerome Powell on Dec. 5 when he testifies to the congressional Joint Economic Committee. Powell will speak two days before November employment data is released. His most recent speech made little specific reference to employment and wages; however, this information will also be watched closely given that unemployment is at a 49-year low and wages logged their largest annual gain in 9-1/2 years in October. If that 3.1% gain in average hourly earnings is repeated for November, it may look like enough of an inflation indication for the Fed to keep the rake hike path intact at its Dec. 18-19 meeting.

Top executives from Volkswagen, BMW and Daimler will participate in a White House meeting next week hoping to head off additional tariffs on German cars, following fresh threats from President Trump to slap more tax on vehicles assembled in the EU. Combined with the effect of China’s economic slowdown, this could spell bad news for Europe’s carmakers, whose earnings have already been hit by tighter regulations. A 25% auto tariff could also reduce 2019 economic growth in the eurozone by 40 basis points to 1.2-1.3%, Barclays calculated. Shares in Europe’s auto sector have fallen almost 25% so far this year and a negative outcome in Washington could dash hopes of any year-end rebound.

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Image of the Week

United States Household Financial Obligations as a Percent of Disposable Personal Income. The percentage has been declining since 2016: