Weekly Market Update

Author : Laura Hochstetler
Date : January 19, 2019

Market Action

Global equities rose significantly this week amid optimism over the potential for a US-China trade deal. The yield on the US 10-year Treasury note rose seven basis points from a week ago and now trades at 2.78%, while the price of a barrel of WTI crude oil advanced 4% to $53.69. Volatility, as measured by the CBOE Volatility Index (VIX), declined to 18 from 20 last Friday.

US equities jumped Thursday afternoon on a Wall Street Journal report that US Treasury secretary Steven Mnuchin had proposed lifting some or all tariffs on China in order to calm markets and give Beijing the incentive to make deeper concessions to end the months-long trade conflict. However, the idea does not have the backing of US Trade Representative Robert Lighthizer, a trade hard-liner who is leading the negotiations with China, nor has it been approved by US president Donald Trump. Later on Thursday, the US Department of the Treasury played down reports that the US might hold out an olive branch to China. Against this backdrop, Chinese vice premier Liu He is scheduled to travel to Washington at the end of this month for another round of formal negotiations.

Theresa May’s Brexit deal suffered a crushing defeat in the British Parliament. Leavers who think the deal does not go far enough in disentangling Britain from the European Union joined Remainers in voting against the government by a majority of 230, the largest defeat of a government on record. Hoping to trigger an election that it thinks it can win, the opposition Labour Party called for a motion of no confidence in the government, which it survived as Tory rebels returned to the fold. May has to return to Parliament with a new Brexit blueprint on January 21st.

Macedonia’s parliament voted to approve the change of the country’s name to North Macedonia, part of a deal that is meant to see Greece lift its opposition to the country’s membership of the EU and NATO. The agreement still needs to be approved by Greece. The odds for that improved after the prime minister, Alexis Tsipras, narrowly saw off a vote of no confidence.

Worse-than-expected trade data from China accentuated concerns about the country’s economic slowdown. Exports dropped by 4.4% in December compared with the same month in 2017 and imports by 7.6%. Imports of goods from America slumped by 36% amid the two countries’ trade disputes. Despite the imposition of tariffs, China still recorded an annual trade surplus with the United States of $323bn, up by 17% from the previous year. China’s central bank, meanwhile, injected 570bn yuan ($84bn) into the banking system to maintain liquidity. The Chinese new year, which starts on February 5th, is normally associated with a surge in cash transactions.

The Trump administration estimated that the partial government shutdown will subtract 0.1% from the pace of economic growth each week, doubling its earlier forecast of a 0.1% drop every two weeks, taking into account ripple effects on government contractors. With the first quarter of the year generally the weakest for GDP growth, an extended shutdown could put growth into negative territory for the quarter.

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

What could affect markets in the days ahead?

Coming days will show whether China’s run of weak economic data continues as it releases fourth quarter growth numbers as well as investment and retail sales for December. But if anything, markets could be surprised on the upside after shockingly bad figures on exports and factory output. Growth is expected to print at 6.4 percent for the fourth quarter, the weakest since the global financial crisis. But that would be in line with rates Chinese policymakers may be targeting – sources tell us some have proposed lowering growth targets to between 6.0 and 6.5 percent.

The steady flow of US macroeconomic data that markets and the US Federal Reserve rely on in order to gauge the health of the nation’s economy has been somewhat disrupted by the partial US government shutdown. For instance, US retail sales data for the critical holiday selling season have been delayed by a lack of funding for the US Department of Commerce. Next week’s personal income and spending data may be delayed as well. However, data continues to flow from departments that were funded earlier in the cycle. The interruption makes the Fed’s job that much more difficult as it interprets conflicting economic signals. Federal Reserve Bank of New York president John Williams noted Friday morning that while economic tailwinds are fading, he forecasts that growth will come in a range between 2% and 2.5% this year, a performance he sees as “consistent with a healthy, growing economy.”

The German economy expanded at a slower-than-expected pace in 2018, growing 1.7%, the most sluggish rate since 2013. That’s down from 2017’s relatively robust 2.2% pace. German growth has faced headwinds over weaker demand from China, emerging markets and the ongoing emissions woes faced by German automakers. A Reuters poll shows that economists expect the European Central Bank to wait until this year’s fourth quarter to hike interest rates, having previously vowed to hold them steady through the summer. The same poll conveys that the median probability of a recession in the next two years has risen to 35% from 30%.

This Week from BlackSummit

Domestic & International Developments: Market Reaction and Assessment
John Charalambakis

Video of the Week

John C. Bogle: A look back at the life of Vanguard’s founder