Weekly Market Update - Dec 17

Posted by FlexShares on Dec 17, 2018 7:38:13 PM

.Market review (1)

Trade developments last week included China’s plan to buy more U.S. agricultural products, reduce tariffs on U.S. autos and possibly reconsider parts of its Made in China 2025 initiative. Find out more in this edition of “The Week in Review.”

Last Week Review

Modest positive trade news offset by softer growth data. Trade developments last week included China’s plan to buy more U.S. agricultural products, reduce tariffs on U.S. autos and possibly reconsider parts of its Made in China 2025 initiative. However, the modestly positive trade news was offset by softening growth data (see below). Global equities declined 1.1% last week, with negative returns across each major region1. Emerging market equities were down 0.9%2, while U.S. and non-U.S. developed market equities declined 1.4%3 and 1.1%4, respectively. Year-to-date, U.S. equities remain in negative territory (-1.7%), but still lead the other major regions by over 10%5. After some weakness in recent weeks, credit spreads tightened a bit last week across investment grade and high yield fixed income.

Flash PMI data continues to soften in the U.S. and Europe. Japan, Europe and U.S. flash Purchasing Managers’ Index (PMI) readings for December were released last week. Europe’s manufacturing figure (51.4) remains in expansionary territory, but slipped below both consensus and the prior level (51.8), while its services figure declined by two points from 53.4 to 51.46. The U.S. manufacturing reading (53.9) came in more than a point below consensus and the prior reading7. Additional economic data released last week included retail sales and industrial production data in China that was modestly below consensus expectations.

ECB set to end asset purchase program this month. The European Central Bank (ECB) will conclude its asset purchase program at year-end after adding about €2.6 trillion to its balance sheet over the last four years. The ECB plans on reinvesting maturing debt until well after rate hikes begin. ECB President Mario Draghi expressed confidence in Europe’s economic outlook but acknowledged softening growth as well as downside risks around geopolitics, financial market volatility and trade – which resulted in the central bank slightly decreasing its 2019 growth and inflation forecasts. Draghi also emphasized the ECB’s flexibility in future policy including the possibility that the ECB would restart quantitative easing if necessary to maintain economic stability.

UK Prime Minister Theresa May survives confidence vote. The Brexit saga continues as May survived a confidence vote and looks to convince Brussels to agree on adjustments to the Brexit deal. Following last Tuesday’s delay of the UK Parliament vote on the Brexit deal, Conservative Party parliament members triggered a confidence vote against May. May won the vote by a 200-117 margin, but conceded before the vote that she would likely not lead her party in the next general election. The vote on the Brexit deal is scheduled to occur no later than January 21, 2019.

This Week Preview

December Fed meeting takes center stage. The December Federal Reserve meeting concludes this Wednesday, with Fed funds futures showing a 72% probability of a rate hike8. Expectations have fluctuated between 65-80% lately, which would be a departure from recent Fed hikes where expectations were often in the 90-100% range leading up to the meeting. Fed messaging on the policy outlook will be very closely followed by investors. Financial markets may take issue with a Fed message that the path of gradual rate hikes will continue, while communication around the Fed taking a pause should be received well by investors. Underwhelming U.S. inflation data could be a reason for the Fed to explain why it is taking a wait-and-see approach before further raising rates.

BOE and BOJ also meet this week. The Bank of England (BOE) and Bank of Japan (BOJ) both meet this Thursday with minimal expectations for monetary policy changes. Since November 2017, the Bank of England increased its main policy rate two times from 0.25% to 0.75%. In that time, UK core inflation fell from 2.7% year-over-year (y/y) at the beginning of the year to 1.9% y/y in October. In addition, inflation data will be released this week in the UK, Europe, and Japan with expectations for readings generally in-line with prior month levels.

Weekly Market Update taking a break. The weekly market update will not be released on December 24 or December 31. We will resume publishing on January 7, 2019.

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Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.

End Notes

1) Bloomberg, MSCI ACWI (All Country World Index) returns 10Dec2018 – 14Dec2018.

2) Bloomberg, MSCI Emerging Market Equities Index return 10Dec2018 – 14Dec2018.

3) Bloomberg, MSCI U.S. Equities IMI Index return 10Dec2018 – 14Dec2018.

4) Bloomberg, MSCI ex-U.S. Equities IMI Index return 10Dec2018 – 14Dec2018.

5) Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2018 – 14Dec2018.

6) A PMI of more than 50 represents expansion of the manufacturing sector when compared to the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change. The Institute of Supply Management (ISM) generates the PMI each month.” Retrieved on 14Dec2018 from https://www.investopedia.com/terms/p/pmi.asp.

7) A PMI of more than 50 represents expansion of the manufacturing sector when compared to the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change. The Institute of Supply Management (ISM) generates the PMI each month.” Retrieved on 14Dec2018 from https://www.investopedia.com/terms/p/pmi.asp.

8) Bloomberg, Fed Funds Futures Index 14Dec2018. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.

Past performance is no guarantee of future results. It is not possible to invest directly in any index and index performance returns do not reflect any management fees, transaction costs or expenses.

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