Weekly Market Update

Author : Laura Hochstetler
Date : February 2, 2019

Market Action

Global equities climbed on the week, likely thanks in part to a dovish turn by the US Federal Reserve. The shift in tone from the Fed pushed the yield on the US 10-year Treasury note down 7 basis points to 2.69%, weakened the US dollar and supported commodity prices. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), declined to 16.4 from 18 a week ago.

With nearly 46% of the constituents of the S&P 500 Index having reported for Q4 2018, blended earnings per share, which combines reported data with estimates for those who have yet to report, shows that earnings growth is running at a 12.4% year over year pace while revenues are seen rising 6.4% compared with the same quarter a year ago, according to FactSet Research.

The US Federal Reserve indicated Wednesday that it is done raising interest rates for now, fueling a market rally. Officials voted to hold their benchmark rate steady and delivered an about-face from their policy stance six weeks earlier. As for the size of the Fed’s balance sheet, Chairman Powell indicated that they are flexible regarding its shrinkage which also raised expectations about a dovish approach to balance sheet shrinkage.

A free trade agreement between Japan and the EU entered into force on February 1, covering 635 million people and almost one-third of the world’s economy. Dubbed the world’s largest free trade agreement, the EU-Japan Economic Partnership Agreement removes duties on almost all agricultural and industrial products and opens up the service sector and procurement. It also moves to eliminate non-tariff barriers to trade.

A series of votes undertaken in the British Parliament this week gave Prime Minister Theresa May a mandate to seek modifications to the withdrawal agreement between the United Kingdom and the European Union. The most contentious issue remains the so-called “Irish backstop,” which potentially locks the UK into a customs union with the EU until a system is put in place to allow customs checks along the border between Ireland and Northern Ireland. EU officials immediately said the EU will not renegotiate the withdrawal agreement. In the near term, observers increasingly expect the UK to ask for an extension of Article 50 from the EU, a request that will likely be granted, as neither side wants a no-deal Brexit.

Narendra Modi’s government unveiled an interim 2019 budget with 750B rupees ($10.6Bn) in cash for Indian farmers and a tax cut for low-income workers, hoping to woo key voter bases ahead of a general election due by May. While Modi’s Bharatiya Janata Party is feeling the heat after losing control of three key states in December, its latest budget could come at a cost by letting fiscal deficit targets slip this year and 2020.

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

What could affect markets in the days ahead?

Trade negotiators from the US and China met in Washington this week, but no breakthroughs were achieved. However, the stage was set for a meeting between Chinese president Xi Jinping and US president Donald Trump in late February, at which Trump indicated the leaders may be able to forge a comprehensive agreement. Trump also suggested that the talks may need to be extended past the 1 March deadline the US imposed at the outset of the negotiations.

Amid falling demand for German exports, German economy minister Peter Altmaier has called for €10 billion in new measures to stimulate Germany’s economy. The package includes incentives for corporate investment and tax deductions for investments in energy efficiency for households and businesses. These measures may only be a start, as Chancellor Angela Merkel is discussing a sweeping cut in corporate taxes, taking the rate down from above 30% today to 25%, in order to counter the recent economic slowdown. Germany is generally regarded as positioned well to carry out fiscal stimulus given its budget and current account surpluses.

Investors are heading into February without some key macroeconomic data that would normally guide them: China will be shut for a week for the Spring Festival. That may drain global financial markets of some liquidity. On the data front, Beijing tends to combine some industrial activity data for the first two months to prevent a skew in the numbers. In the United States, the 35-day government shutdown that ended a week ago has complicated the release and interpretation of macroeconomic data for the world’s biggest economy. Brace for more black holes in spring: In an unprecedented move, Japan will close its stock and bond markets for a 10-day holiday in April to mark the ascension of a new emperor.

This Week from BlackSummit

Crossroads: At the Intersection of Geopolitics and Geoeconomics
Abe Finley

Video of the Week

Riding home for New Year

Image of the Week

The British pound implied volatility has been moving lower as the market becomes more confident that the official Brexit event will be postponed. Is the market too optimistic?