UK Prime Minister Theresa May’s Brexit deal caused the biggest UK government defeat in the modern times of Parliament, losing by 230 votes. Find out more in this edition of “The Week in Review.”
Last Week Review
U.S. considers adjusting tariffs on China. The U.S. and China are looking to make a deal before March 1 where the tariff rate on $200 billion of goods from China would increase from 10% to 25%. U.S. officials are discussing removing or decreasing tariffs now to benefit them at the negotiating table long-term as they look to win concessions on China’s handling of intellectual property. President Donald Trump also may be looking to impose tariffs on European Union automobiles to encourage Europe to buy more U.S. farm products. Global equities gained 2.2% last week after a positive response to the U.S.-China developments1. Equity returns were positive across the U.S. (2.9%), emerging markets (1.6%) and non-U.S. developed markets (1.2%)2. Year-to-date, global equities are up 6.2%, thanks to mid-single-digit gains across each major region3. In fixed income markets, high yield credit spreads tightened 23 basis points further to 4.22%4 while investment grade spreads tightened 8 basis points to 1.29%5.
Disappointing trade, consumer and industrial data from China. Data from China fell below prior-month readings and expectations as imports and exports declined 7.6% and 4.4% on a year-over-year basis, respectively6. Global equity markets responded negatively last Monday with all major regions down for the day with the steepest declines coming out of emerging markets7. China industrial production and retail sales data also came in below prior readings. Elsewhere, core and headline inflation data was released throughout last week in the UK, Germany, Japan and Europe. With the exception of Europe core inflation which was unchanged, all other regions saw year-over-year inflation decline from respective prior levels.
Rejected Brexit deal leaves uncertain future for the UK. UK Prime Minister Theresa May’s Brexit deal caused the biggest UK government defeat in the modern times of Parliament, losing by 230 votes. Following the rejected deal, May faced another vote of no confidence, this time from the opposition party, which she survived. May has a couple of options in the next deal she presents on January 21, including entering a new customs union with the European Union or seeing if she can find a majority in the House of Commons. The rejected deal is likely to extend the March 29 Brexit deadline by anywhere from three months to a year.
Earnings growth ahead of consensus with many companies left to report. So far, 56 S&P 500 companies (11%) have reported earnings with aggregate earnings growth of 16.6% and revenue growth of 7.0%8. We believe earnings reports from large banks did not reveal any significant concerns about issues in the consumer and corporate credit spaces.
This Week Preview
Fourth quarter earnings moves along into its second week. The second week of earnings season highlights companies across many sectors. Johnson & Johnson (JNJ) out of the health care sector reports on Tuesday. United Technologies (UTX), Procter & Gamble (PG) and Comcast (CMCSA) release their earnings on Wednesday. Thursday will conclude the week with remaining notable companies Union Pacific (UNP), Intel (INTC) and Starbucks (SBUX).
Flash PMI readings expected to modestly decline from prior levels. Towards the end of 2018, Purchasing Managers’ Index (PMI) data revealed slowing but positive economic growth. Flash manufacturing PMI data for January will be released this week with modest declines from prior levels expected across the U.S. (53.5) and Europe (51.3). Despite concerns on the growth outlook, each of the regions reporting this week is expected to remain in expansionary territory (above 50).
Accommodative monetary policy likely to continue into 2019. The Bank of Japan and European Central Bank meet on Wednesday and Thursday. Central bank leaders are likely to signal patience similar to the Federal Reserve as low inflation and slowing economic growth pose challenges to policy tightening decisions. The European Central Bank has concluded its asset purchase program, though the central bank is still reinvesting proceeds from maturing securities.
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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.
1) Bloomberg, MSCI World ex-U.S. IMI Index returns 14Jan2019 – 18Jan2019.
2) Bloomberg, The major regions returns are the MSCI U.S. Equities IMI Index, MSCI ex-U.S. Equities IMI Index and the MSCI Emerging Market Equities Index returns 14Jan2019 – 18Jan2019.
3) Bloomberg, MSCI World ex-U.S. IMI Index returns 02Jan2019 – 18Jan2019.
4) Bloomberg Barclays Global High Yield Total Return Index value for the period of 14Jan2019 – 18Jan2019. Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.
5) Bloomberg Barclays U.S. IG Corporate Bond Index value for the period of 14Jan2019-18Jan2019. Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.
6) Seth, R. The Economic Times, Decoded: The Chinese Economic Slowdown LINK: https://economictimes.indiatimes.com/news/economy/indicators/decoded-the-chinese-economic-slowdown/articleshow/67633558.cms
7) Bloomberg, The major regions returns are the MSCI U.S. Equities IMI Index, MSCI ex-U.S. Equities IMI Index and the MSCI Emerging Market Equities Index returns 14Jan2019. Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.
8) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 18Jan2019 from http://lipperalpha.financial.thomsonreuters.com/2019/01/this-week-in-earnings-9/.
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.