Weekly Market Update

Author : Laura Hochstetler
Date : February 16, 2019

Market Action

Global equities rose on the week, boosted by progress toward a trade agreement between the United States and China. The yield on the US 10-year Treasury note rose 2 basis points to 2.66% compared with last Friday, while the price of a barrel of WTI Crude oil rose roughly $2.50 to $55.25. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), fell to 15.6 from 17.5 a week ago.

With 79% 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 13.1% year-over-year pace while revenues are seen rising 7% compared with the same quarter a year ago, according to FactSet Research. Estimates for Q1 continue to be lowered, however, with analysts now expecting earnings per share to decline around 2.5% this quarter.

China and the US inched toward a broad agreement aimed at defusing their market-rattling trade tensions, with negotiators agreeing to further talks next week in Washington after a weeklong session in Beijing. In the latest round, senior officials from both sides made some progress in sketching out a memorandum of understanding, reported the Wall Street Journal, with officials describing it as a bare-bones pact that could serve as the framework for a deal that President Trump and Chinese leader Xi Jinping later finalize at a summit.

US Congressional negotiators cobbled together a package to fund approximately 25% of the federal government for the remainder of this year. The agreement includes $1.375 billion dollars for barriers along the southern border of the US, which is significantly less than the $5.7 billion sought by the White House. On Friday, President Trump signed the funding bill but also declared a national emergency as a tactic to shift more funds to border barrier construction.

Spain’s lower house rejected the Socialist government’s 2019 spending plan, prompting a snap election scheduled for 28 April. Pro-Catalan independence groups withheld support for the government’s budget over the issue of independence for Catalonia and Madrid’s prosecution of leaders of the independence movement. This will be the third Spanish election in four years. European political uncertainty has been on the rise of late, highlighted by disagreements within Italy’s fractious left-right coalition, recent riots in France and Chancellor Angela Merkel’s lame duck status in Germany.

A motion to back British prime minister Theresa May’s efforts to renegotiate the terms of the Brexit withdrawal agreement was defeated in Parliament on Thursday, as was a motion calling for a three-month Brexit delay. With just six weeks to go until the United Kingdom is scheduled to withdraw from the European Union, how the exit will shake out remains very much in doubt. The UK’s chief Brexit negotiator, Olly Robbins, was overheard by a reporter in a Brussels bar saying that a reworked deal or a significant Brexit delay are the most likely results.

German GDP was unchanged in the final quarter of 2018 in the wake of a Q3 decline, allowing Europe’s largest economy to narrowly avoid falling into a technical recession, or two consecutive quarters of negative growth. Slowing global growth and ripple effects from ongoing US-China trade friction continue to weigh on demand for European exports, as exemplified by the dramatic 4.2 % drop in eurozone industrial production in December.

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

What could affect markets in the days ahead?

Expectations for first-quarter earnings per share on the S&P500 have gone negative, and average estimates are for a 0.3 percent year-on-year decline, according to I/B/E/S Refinitiv. That’s a big markdown from October forecasts of 8.2 percent and would be the first earnings contraction in three years. Gloom is deep on the other side of the Atlantic too, with European earnings growth seen at the slowest rate in 18 months. (US comparisons with previous quarters are of course skewed by President Donald Trump’s generous tax breaks, which handed companies a big windfall in early 2018 but have now expired.)

On Thursday, we get a glimpse of the mood amongst purchasing managers when Japanese, US and eurozone “flash” PMI data is released. They made for pretty gloomy reading last month – eurozone PMIs for instance, were barely above the 50-mark which separates contraction from expansion, pointing to Q1 growth of just 0.1 percent. In Asia, China’s factory activity shrank the most in almost three years, while Japanese factories were on the cusp of contraction. Brexit-battered UK also stalled and even US PMIs hinted at slowdown, though in much better shape than others. It is unlikely markets’ mood will be much improved by the PMIs. But China’s latest trade data offered a glimmer of hope, showing that in January, exports surged and imports fell much less than in previous months. Whether that will show up in sentiment surveys elsewhere remains to be seen.

The US Commerce Department is set to meet a Sunday deadline to deliver its recommendations to President Trump on whether imported vehicles and parts pose a national security risk. It’s already a rough environment out there for European auto sales, with data overnight pointing to a 4.6% decline in car registrations for January. Trump administration officials have said tariff threats are intended to win further EU concessions at the bargaining table.

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