Optimism around U.S.-China trade truce cools as details emerge. 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
Industrials companies in focus in the second week of earning season. Earnings season continues with companies reporting across a variety of sectors this week. A few key companies in the industrials sector will be releasing results such as Caterpillar (CAT) on Wednesday. Additional companies reporting this week include United Parcel Service (UPS), Boeing (BA), Microsoft (MSFT), Amazon (AMZN) and Intel (INTC)7.
Little improvement anticipated in flash PMI data. Two key questions in this round of flash purchasing managers’ index (PMI) data are whether the manufacturing sector shows signs of improvement and whether the weakness in the manufacturing sector spreads further to the services sector. The U.S. manufacturing PMI is expected to fall to 50.8, while the services figure is expected to tick up to 51.0. Modest increases are expected across the manufacturing and services readings in Europe and Germany.
ECB meets Thursday in the final meeting of Draghi’s term. Expectations for a policy change are minimal in this week’s European Central Bank (ECB) meeting given the rate cut and restart of the asset purchase program announced in the prior meeting. More attention will be paid to details around the asset purchases which will start in November at €20 billion per month as well as concerns from ECB officials who have opposed this round of asset purchases. ECB President Mario Draghi’s term concludes at the end of October and new leader Christine Lagarde will step in on November 18.
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 14Oct2019 – 18Oct2019.
- 2. Bloomberg, MSCI Emerging Market Equities Index returns 14Oct2019 – 18Oct2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 14Oct2019 – 18Oct2019. Bloomberg, MSCI U.S. Equities IMI Index 14Oct2019 – 18Oct2019.
- 3. Bloomberg, 2-Year Treasury Rate 14Oct2019 – 18Oct2019. Bloomberg, 10-Year Treasury Rate 14Oct2019 – 18Oct2019.
- 4. Mckenzie, Sheena. CNN. Brexit deal agreed as EU leaders endorse Boris Johnson’s plan. Retrieved on 21Oct2019 from https://www.cnn.com/uk/live-news/brexit-eu-summit-oct-17-dle-intl-gbr/index.html
- 5. Deng, Chao. Wei, Lingling. Wall Street Journal. Uncertainty Clouds China’s Commitment to U.S. Farm Purchases. Retrieved on 21Oct2019 from https://www.wsj.com/articles/doubts-persist-over-chinas-commitment-to-u-s-farm-purchases-11571218201.
- 6. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 21Oct2019 from http://lipperalpha.financial.thomsonreuters.com
- 7. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 21Oct2019 from http://lipperalpha.financial.thomsonreuters.com
- 8. Ranasinghe, Dhara. Reuters. A quiet exit for Draghi? Five questions for the ECB. Retrieved on 21Oct2019 from https://www.reuters.com/article/us-eurozone-markets-ecb-graphic/a-quiet-exit-for-draghi-five-questions-for-the-ecb-idUSKBN1X00HR