Weekly Review Brief - December 16, 2019

Posted by FlexShares on Dec 16, 2019 4:48:46 PM

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Resounding victory for Conservative party in U.K. general election.  Find out more in this edition of “The Week in Review.”

Last Week Review

Trade, Brexit and central banks drive solid week for global equities. Global equities pushed higher last week following constructive developments across Brexit and trade, as well as continued accommodation from major developed market central banks1. Emerging market equities gained 3.5% last week, leading both U.S. (0.6%) and non-U.S. developed market equities (1.6%)2

U.S. and China arrive at phase one trade deal. Negotiations between the U.S. and China last week led to a limited agreement of reduced U.S. tariffs in exchange for China buying U.S. agricultural goods. The U.S. will cancel the round of tariffs set to apply on December 15 and cut current tariffs on about $120 billion of Chinese imports by about half. In return, China will purchase roughly $40 billion of agricultural goods, provide greater market access and intellectual property protection. If China fails to comply, a “snapback” provision will reapply the tariffs that were removed. In other trade news, the U.S.-Mexico-Canada Agreement (USMCA) gained some momentum in the U.S. with support from both political parties, meaning it could be ratified in 20203.

Resounding victory for Conservative party in U.K. general election. Last Thursday’s general election resulted in Boris Johnson’s Conservatives taking a majority of about 80 seats. His victory removes the risk of a “no deal” Brexit and likely means the Withdrawal Agreement negotiated between Johnson and the European Union (EU) will go into effect on January 31. A transition period beginning on February 1 will mark the beginning of difficult negotiations for a Free Trade Agreement with the EU4.

Dovish Fed leaves policy unchanged. The Federal Reserve held rates steady in the 1.50-1.75% range after cutting rates three times in 2019 due to concerns on slowing growth, low inflation and trade. Fed Chairman Jerome Powell reiterated that the bar remains very high for the Fed to consider tightening policy. The Fed remains on hold as the strong labor market, improving manufacturing sector and easing trade tensions have mitigated risks to the growth outlook5. Fed officials’ updated forecasts call for no change in policy in 2020. Market expectations for Fed rate cuts have shifted lower, with Fed funds futures implying about a 37% probability of a rate cut in the first half of 20206.

ECB remains accommodative heading into 2020. In Christine Lagarde’s first meeting as European Central Bank (ECB) President, she laid the groundwork for a central bank strategy review that will take place throughout 2020. Officials will review inflation targeting and the policy tools at hand. ECB policy remains unchanged and the central bank is committed to negative rate policy until inflation nears the central bank’s 2% target. Investors expect Lagarde to continue to push for fiscal stimulus7.

This Week Preview

December flash PMI readings expected to show continued improvement. The manufacturing sector struggled in 2019 partly because of U.S.-China trade tensions. Manufacturing Purchasing Managers’ Index (PMI) readings appear to have bottomed around September and have been generally trending higher since then. Manufacturing sector surveys expect this trend to continue for Europe and Germany but also show an unchanged reading in the U.S. The Europe and Germany readings are expected to remain deep in contractionary territory (below 50), but easing trade tensions between the U.S. and China may help eventually bring Europe’s trade-dependent economy back into expansionary territory. Consensus expectations for the services sector readings across most of the developed regions reporting this week also point to modest improvement with all the regions in expansionary territory.

Bank of England and Bank of Japan unlikely to change policy. In addition to central bank meetings, global inflation readings will be released across the major developed markets. Core Personal Consumption Expenditures in the U.S. is expected to tick down from October’s reading to 1.5% year-over-year. Core Consumer Price Index readings across Europe, Japan and the U.K. are expected to remain close to prior levels.

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.

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End Notes

  1. 1. Bloomberg, MSCI World Index returns 09Dec2019 – 13Dec2019.
  2. 2. MSCI Emerging Market Equities Index returns 09Dec2019 – 13Dec2019. Bloomberg, MSCI U.S. Equities IMI Index 09Dec2019 – 13Dec2019. MSCI World ex-U.S. IMI Index returns 09Dec2019 – 13Dec2019.
  3. 3. Mauldin, William. Wei, Lingling, Leary, Alex. Wall Street Journal. U.S., China Agree to Limited Deal to Halt Trade War. Retrieved on 16Dec2019 from https://www.wsj.com/articles/us-china-confirm-reaching-phase-one-trade-deal-11576234325.
  4. 4. Georgiadis, Philip. McCormick, Myles. Provan, Sarah. Middlehurst, Charlotte. Samson, Adam. Noble, Josh. Financial Times.  UK election results: Boris Johnson says he has ‘stonking mandate’ on Brexit as it happened. Retrieved on 16Dec2019 from https://www.ft.com/content/470b4c60-706e-3a62-927e-40ce5ed6f97a
  5. 5. Federal Open Market Committee. (December 11, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 16Dec2019 from https://www.federalreserve.gov/monetarypolicy/fomcpresconf20191211.htm
  6. 6. Bloomberg, Fed Funds Futures Index 16Dec2019. 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
  7. 7. Balaza, Koranyi, Canepa, Francesco. Reuters. Lagarde in the spotlight at first ECB Meeting. Retrieved on 16Dec2019 from https://www.reuters.com/article/ecb-policy/lagarde-in-the-spotlight-at-first-ecb-meeting-idUSL4N28L36H.

Tags: Weekly Market Update