U.S. and China continue to work toward trade deal. Find out more in this edition of “The Week in Review.”
Last Week Review
Mixed trade developments as interest rates push higher. Global equities moved 0.9% higher on the potential for a signed mini-deal between the U.S. and China in the near future1. Emerging market equities appreciated the most up 1.4%, followed by U.S. and non-U.S. developed market equities at 0.9% and 0.6%, respectively2. U.S. interest rates moved higher last week, leading to some yield curve steepening with the 10-year Treasury yield up 23 basis points and the 2-year yield up 12 basis points3.
U.S. and China continue to work toward trade deal. Despite some increased optimism on U.S.-China trade negotiations, key questions remain on whether U.S. tariff concessions will consist of rolling back existing tariffs or only cancelling future tariffs. Investors initially expected the countries to sign a phase one deal in November, but a decision on the location of the signing may delay its completion into December. A signed deal will likely improve China’s economic outlook4. Recently, China’s import and export figures showed improvement but still remain in negative territory. In other economic data, China’s composite Purchasing Managers’ Index reading ticked higher to 52.0, continuing an upward trend that began in July.
BOE cuts growth outlook while PBOC modestly eases policy. Last Thursday, the Bank of England (BOE) left policy unchanged, though two BOE officials unexpectedly voted in favor of a rate cut. The central bank pointed to growth headwinds for the U.K. in the form of ongoing Brexit uncertainty and a weaker global growth outlook. The BOE also acknowledged the possibility it would ease policy in the event the growth environment further deteriorates. While the situation in the U.K. remains fluid given Brexit and the upcoming general election, investors currently expect about a 35% probability of a BOE rate cut by late March. In China, the People’s Bank of China (PBOC) implemented a small rate cut, though some investors expect the central bank may further ease policy in the coming months5.
Aggregate earnings growth may end up slightly below zero. Earnings season is largely complete as 89% of S&P 500 companies have reported results6. Aggregate earnings growth of -1.0% year-over-year (y/y) and revenue growth of 3.8% y/y are ahead of consensus expectations by 4.7% and 0.5%, respectively. Though aggregate earnings growth is slightly in negative territory, earnings results have been good enough to avoid a drag on investor sentiment7. Large declines across a few sectors have weighed on the aggregate earnings results including energy (-37.7% y/y) and materials (-21.0% y/y)8. Meanwhile, earnings growth has been considerably stronger in the health care (8.9% y/y) and communication services (5.4% y/y) sectors9.
This Week Preview
Earnings season nears the finish line. Third quarter earnings season is wrapping up with most of the companies left to report coming out of the consumer-related and tech sectors including Wal-Mart (WMT) this Thursday. The company typically offers a read on the consumer environment in the U.S. and would stand to benefit from the removed prospect of further tariffs on consumer goods in a U.S.-China mini-deal10.
No major changes expected in global inflation data. Inflation figures for the U.S., Europe, Germany and the U.K. will report throughout the week with low expectations for upward movement across any of the regions. U.S. headline and core Consumer Price Index (CPI) readings are expected to match prior levels at 1.7% y/y and 2.4% y/y, respectively. Despite three rate cuts by the Federal Reserve in 2019, inflation has failed to move much closer to the central bank’s 2% target. Even with a negative deposit facility rate at -0.5%, CPI in Europe is expected to remain at 1.1% y/y. Finally, inflation readings in the U.K. and Germany are also expected to remain below 2%.
China retail and industrial data expected to remain near prior levels. Chinese retail sales, industrial production and fixed asset investment data will be released this Wednesday. Each series is expected to remain mostly unchanged from its prior level. Investors continue to track Chinese economic data, though China’s growth outlook would improve notably in the event of a signed phase one U.S.-China trade deal.
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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- 1. Bloomberg, MSCI World Index returns 04Nov2019 – 08Nov2019.
- 2. Bloomberg, MSCI Emerging Market Equities Index returns 04Nov2019 – 08Nov2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 04Nov2019 – 08Nov2019 Bloomberg, MSCI U.S. Equities IMI Index 04Nov2019 – 08Nov2019.
- 3. Bloomberg, 10-Year Treasury Rate 04Nov2019 – 08Nov2019. Bloomberg, 2-Year Treasury Rate 04Nov2019 – 08Nov2019.
- 4. Mason, Jeff. Yawen, Chen. Reuters. China, U.S. agree tariff rollback if phase one trade deal is completed. Retrieved on 11Nov2019 from https://reuters.com/article/us-usa-china-trade/china-says-have-agreed-with-u-s-to-cancel-tariffs-in-different-phases-idUSKBN1XH0TG
- 5. Meredith, Sam. CNBC. Sterling falls after Bank of England split on interest rate cut. Retrieved on 11Nov2019 from https://cnbc.com/2019/11/07/bank-of-england-holds-interest-rates-ahead-of-snap-election.html
- 6. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 11Nov2019 from http://lipperalpha.financial.thomsonreuters.com
- 7. Basmajian, Eric. Seeking Alpha. S&P 500 Earnings Update: Q4 To Turn Negative. Retrieved on 11Nov2019 from https://com/article/4304674-s-and-p-500-earnings-update-q4-turn-negative.
- 8. Bloomberg, S&P 500® Global Natural Resources Index performance 04Nov2019-11Nov2019. The index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified and investable equity exposure across 3 primary commodity-related sectors: agribusiness, energy, and metals and mining.
- 9. S&P 500® Telecom Index performance 04Nov2019-11Nov2019. Comprising those companies included in the S&P 500 that are classified as members of the GICS® telecom sector. Bloomberg. S&P 500® Financials Index performance 04Nov2019-11Nov2019. Comprising those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
- 10. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 11Nov2019 from http://lipperalpha.financial.thomsonreuters.com