Weekly Review Brief - October 14, 2019

Posted by FlexShares on Oct 14, 2019, 11:01:26 AM

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EU believes in possibility of new exit deal. Find out more in this edition of “The Week in Review.”

Last Week Review

Trade and Brexit optimism drive global equities higher. The positive short-term developments on U.S.-China trade talks and Brexit negotiations between the U.K. and the European Union (EU) boosted global equities at the end of last week to a 1.3% weekly gain1. Non-U.S. developed markets (2.1%) appreciated the most and were followed by emerging markets (1.4%) and U.S. equities (0.7%)2. Interest rates also increased, including an upward move of 20 basis points for the 10-year Treasury yield3.

Trade talks lead to limited U.S.-China trade agreement. Last week began with U.S. discussions of import restrictions on Chinese nationals and a ban of sales to certain Chinese technology firms. However, optimism began to increase on U.S.-China trade talks throughout last week. A tentative agreement was announced last Friday that included plans for China to purchase $40-50 billion worth of U.S. agricultural goods in exchange for the U.S. delaying the 5% incremental tariff on $250 billion worth of Chinese goods previously set to be implemented on October 15. The agreement is set to be finalized in the next month and could be signed in November. Though some progress was made in the talks, a number of key issues remain unsolved including intellectual property, industrial subsidies, market access and currency practices which makes a comprehensive trade agreement unlikely. Also, the planned U.S. tariffs on consumer goods that will launch on December 15 were not part of the agreement4.

EU believes in possibility of new exit deal. After initially rejecting U.K. Prime Minister Boris Johnson’s Brexit withdrawal proposal, developments late last week led to the EU allowing for a renegotiation period. It was reported that Johnson offered concessions around the Ireland-Northern Ireland border. The EU and U.K. will continue discussions over the coming weeks including the Brussels summit starting on October 17 with the October 31 Brexit deadline less than three weeks away. Another three-month extension is a likely scenario, though the situation remains very fluid5.

Powell comments increase expectations for October Fed rate cut. Federal Reserve Chairman Jerome Powell announced that the Fed will resume buying bonds to expand its balance sheet. He stated that these actions differ from quantitative easing as the short-term Treasury purchases are meant to aid lending rather than stimulate economic growth. Investors saw the announcement as a way to separate the balance sheet from a potential Fed rate cut in late October. Market expectations for a rate cut moved from 69% prior to the comments to above 80% before finishing the week at 71%6. In U.S. economic data last week, headline and core Consumer Price Index levels were both unchanged in September with year-over-year figures of 1.7% and 2.4%, respectively.

This Week Preview

Banks begin unofficial start to third quarter earnings season. Starting on Tuesday, large banks out of the financial sector including Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) will kick off the third quarter earnings season. Consensus third quarter S&P 500 earnings estimates forecast a 4.1% year-over-year decline. If this forecast comes through correctly, it would be the first stream of three negative quarters since the fourth quarter of 2015 through 2016’s second quarter. However, earnings often top consensus estimates by 2-4% so a flat or slightly positive aggregate earnings figure is still possible. Other notable companies reporting this week include Johnson & Johnson (JNJ), Bank of America (BAC), American Express (AXP) and Coca-Cola (KO)7.

China economic data in focus following easing in trade tensions. Though this week’s China data releases will not reflect last week’s U.S.-China trade agreement, investors will continue to follow the implemented tariffs’ effects on both the U.S. and Chinese economies to determine if either country is more likely to make concessions in future deals given pressures from slowing growth. Economist surveys expect year-over-year decreases to both imports and exports in China and expect industrial production, retail sales and fixed asset investment to remain mostly unchanged from August’s readings. Reviewing trade elsewhere, the U.S. and EU will meet Monday to discuss the tariffs the U.S. plans to impose on Europe starting October 188.

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 07Oct2019 – 11Oct2019.
  2. 2. Bloomberg, MSCI World ex-U.S. IMI Index returns 07Oct2019 – 11Oct2019. Bloomberg, MSCI Emerging Market Equities Index returns 07Oct2019 – 11Oct2019. Bloomberg, MSCI U.S. Equities IMI Index 07Oct2019 – 11Oct2019.
  3. 3. Bloomberg, 10-Year Treasury Rate 07Oct2019 – 11Oct2019.
  4. 4. Lawder, David. Wang, Echo. Retuers. Day 1 of U.S.-China trade talks ends with hopes for limited deal. Retrieved on 14Oct2019 from https://www.reuters.com/article/us-usa-trade-china/day-1-of-u-s-china-trade-talks-end-with-hopes-for-limited-deal-idUSKBN1WP0H6
  5. 5. Colchester, Max. Norman, Laurence. The Wall Street Journal. Britain, EU Trade Blows Ahead of Brexit Deadline. Retrieved on 14Oct2019 from https://www.wsj.com/articles/britain-eu-trade-barbs-ahead-of-brexit-deadline-11570537793
  6. 6. Bloomberg, Fed Funds Futures Index 11Oct2019. 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. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 14Oct2019 from http://lipperalpha.financial.thomsonreuters.com
  8. 8. Lee, Yen Nee. CNBC. China’s imports and exports fell more than expected in September. Retrieved on 14Oct2019 from https://cnbc.com/2019/10/14/china-economy-chinese-imports-exports-trade-data-for-september-2019.html

Tags: Weekly Market Update