Weekly Market Update

Author : Laura Hochstetler
Date : December 8, 2018

Market Action

Global equities declined on the week amid increasing concerns over global growth and lingering trade tensions. The yield on the US 10-year Treasury note slumped nearly 14 basis points from a week ago, to 2.85%, while volatility, as measured by the CBOE Volatility Index (VIX), rose to 20.2 from 18.8 last Friday.

While the United States and China agreed at last weekend’s G20 summit to embark on an intensive 90-day negotiation toward coming to a long-term agreement on trade, the talks got off to a rocky start this week. US president Donald Trump issued a series of tweets which suggest that the US will hold a hard line in the negotiations; however, a day after markets tumbled in the wake of the tough talk on trade, the president said China sent strong messages about wanting to conclude a deal and the Chinese Ministry of Commerce said that Beijing is “very confident” about reaching an agreement within the 90-day negotiating window. Complicating matters is the arrest in Canada last weekend of an executive of Chinese telecom equipment manufacturer Huawei (who is also the daughter of the company’s founder), at the behest of the US Department of Justice. She faces extradition to the US on suspicion of using the global banking system to evade US sanctions on Iran. Some of this week’s volatility was likely spurred by concerns that the arrest could derail the renewed US-China talks.

Weeks of violent protest in Paris and other French cities forced President Emmanuel Macron to cancel the planned hikes in fuel taxes that were scheduled to come into effect in 2019. However, the tax hike was not the only issue that enflamed rioters, and the protests have raised concerns that anti-government sentiment is building across Europe. Macron’s approval rating is presently only 18% amid low wage growth, high taxes and the fourth-highest unemployment rate in the EU.

OPEC and non-member nations including Russia agreed on a production cut of around 1.2 million barrels per day. That’s slightly more than analysts had anticipated, and sparked a rebound in crude prices. On Friday West Texas Intermediate crude closed up more than $1 a barrel, at $52.55. Talks had hit a snag earlier this week when Saudi Arabia and Russia disagreed about sharing the pain of curbs to stop a 30% drop in oil prices. The sway held by Russia over the cartel’s recent decisions suggests that Saudi Arabia may be losing its some of its control over the group.

Annegret Kramp-Karrenbauer, a close ally of Angela Merkel, was elected leader of Germany’s Christian Democrats in a victory that safeguards the chancellor’s legacy. Ms Kramp-Karrenbauer won 52% in a run-off vote at a conference of the Christian Democratic Union (CDU) in Hamburg. Rival Friedrich Merz, a millionaire corporate lawyer who once served as leader of the CDU’s parliamentary group, garnered 48% of the vote.

Yemen’s internationally recognized government and Houthi leaders met in the Swedish city of Rimbo for the first direct peace talks between the warring parties in two years, announcing a comprehensive prisoner exchange as one of several steps to win mutual trust in an effort to resolve a nearly four-year war that has left tens of thousands dead and pushed millions to the brink of starvation. Neither the government nor the Houthi leaders have shown any serious inclination to end the war, the Wall Street Journal reported, and the participants do not expect to reach a lasting deal during the current round of talks.

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

What could affect markets in the days ahead?

On Tuesday, just hours before the start of a five-day debate in the British parliament on May’s Brexit deal, a top official at the European Court of Justice issued a legal opinion stating Britain could pull back its formal divorce notice. A final ruling by the ECJ is expected within the next few weeks. (The court generally follows the official’s legal advice but there have been frequent exceptions.) Theresa May has refused to rule out the idea of scrapping next Tuesday’s House of Commons vote on her Brexit deal amid speculation that she could postpone the date to try to win over Tory rebels or attempt a renegotiation with Brussels.

With major parts of the U.S. economy slowing, the Treasury market has reacted by approaching the curve inversion that has preceded every recession in the last 40 years. The spread between three- and five-year Treasury yields dropped below zero on Monday, with the two-year yield also trading higher than the five-year later in the week. Markets have traditionally seen an inversion of the two- to 10-year spread as a harbinger of recession. While we are not there yet, the 10-year yield dropped below its 200-day moving average for the first time this year. Signs of slowdown have persuaded markets to bet the Fed will slow the pace of rate increases next year. However, inflation is running at a 9-month high, annual wage growth a 9-1/2 year high and unemployment at a near-50 year low. Thus the November inflation report, due on Dec. 12, may play into how Fed chair Jerome Powell frames the path of future tightening.

The United States reported this past week that its trade deficit hit a 10-year high in October, and its politically sensitive deficit with China surged to a record $43 billion. So markets will watch to see how China hawks in the Trump administration react to China’s trade data that is due for release on December 8. The data should show whether China is carrying out promises to import more from America.