Weekly Market Update

Author : Laura Hochstetler
Date : January 12, 2019

Market Action

Global equities moved higher on the week, likely boosted by progress in US-China trade talks and signs that the US Federal Reserve will take a go-slow approach on additional rate hikes. The yield on the US 10-year Treasury note firmed four basis points to 2.69% while the price of a barrel of WTI crude oil rose nearly $3 to $51.80 amid talk of further Saudi supply cuts. Volatility, as measured by the CBOE Volatility Index (VIX), slipped to 20 from 22.5 a week ago.

Technical talks at the vice-ministerial level in Beijing between the US and China reportedly made progress this week and were extended for a day. Progress was reported on issues such as China increasing purchases of US agricultural and energy commodities, but major issues remain, such as China’s subsidies to state-owned enterprises and respect for intellectual property rights. Those are expected to be tackled in senior-level talks in Washington on January 30-31.

Minutes of the December meeting of the US Federal Reserve’s Open Market Committee showed that “many participants expressed the view that, especially in an environment of muted inflation pressures, the committee could afford to be patient about further policy firming.” Fed chairman Jerome Powell reiterated that view on Thursday in an appearance in Washington. Market prices suggest that there are low odds of a hike in policy rates in the first half of 2019. Powell expressed concern over slowing global growth but says he sees inflation holding steady close to the Fed’s 2% target.

Industrial production data for Germany and France, the eurozone’s two largest economies, fell sharply in November, the governments reported this week. In Germany output fell 1.9% while in France it was down 2.1%. Italy and Spain saw output decline 1.6% and 1.5%, respectively. The soft data reinforce the notion that while the European Central Bank has ended its asset purchase program, rate hikes are probably more than a year away.

The Democratic Republic of Congo’s electoral commission declared opposition leader Félix Tshisekedi as the winner of the Dec. 30 presidential election, an announcement that contradicts an unofficial tally by the largest observer mission and throws the Central African nation into uncharted territory: This is the first time since independence from Belgium that an opposition candidate takes the presidency of the resource-rich country after an election. The result is questioned by many members of the international community such as Belgium and France, by election observers including Congo’s Catholic Church (which had some 40,000 observers monitoring the vote and ballot count), and by the other opposition parties amid speculation that outgoing president Mr. Kabila made a deal with Mr. Tshisekedi to keep a more critical rival from power.

In Syria, as the US-led coalition against Islamic State has begun the process of withdrawing troops, Kurdish groups that control the north are turning to Moscow and Damascus in the hope of striking a political deal that will stave off Turkey and shield their autonomy in the north. Turkey aims to pursue a campaign against Kurdish forces that have allied with the United States, while the Russia- and Iran-backed Syrian government sees the chance to recover a huge chunk of territory.

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

What could affect markets in the days ahead?

The British Parliament is scheduled to vote on the withdrawal agreement negotiated with the European Union by the government of prime minister Theresa May on Tuesday, 15 January. May is expected to lose the vote, and, having lost a vote on an amendment this week, must present an alternative plan in just three days. With a growing risk of the UK failing to ratify an agreement with the EU, momentum is growing for it to ask the EU to extend the Brexit date while May tries to negotiate a deal that can be passed by Parliament. Should the government lose the most important vote of its tenure, pressure may grow on May to call a general election to try to settle the Brexit question.

Despite dueling national addresses from US president Donald Trump and Representative Nancy Pelosi and Senator Chuck Schumer, the Democratic leaders in the US House of Representatives and Senate, no progress was made this week toward ending what could become the longest US government shutdown in 40 years. Historically, shutdowns have not been very economically disruptive, but if this (partial) shutdown drags on, tax refunds could be delayed and programs such as housing assistance for low-income families could be disrupted.

While there has not yet been an official announcement from the Chinese government, Reuters reported this week that sources stated China will lower its 2019 economic growth target to 6%-6.5% from around 6.5% in 2018. Growth of about 6.2% is needed over the next two years for China to reach its objective of doubling its gross domestic product this decade. Ongoing trade tensions with the US have put that goal in jeopardy.

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Year-on-year earnings per share (EPS) growth of S&P 500 companies in 2018 greatly exceeded consensus expectations from the beginning of that year – an unusual development compared to previous years as shown below. Consensus expectations for 2019 EPS growth are also shown below.