Weekly Review Brief - October 28, 2019

Posted by FlexShares on Oct 28, 2019, 4:16:09 PM

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Global equities pushed higher despite mixed economic data. Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities pushed higher despite mixed economic data. Equities were helped by earnings surprises and sentiment on trade last week, while steady U.S. economic data offset weaker European manufacturing data1. China plans to increase agricultural purchases to $20 billion with the potential for more in the future, while the U.S. said it was close to finalizing the first phase of a trade deal with China2. Global equities moved 1.3% higher last week3.

Flash Purchasing Managers’ Index data weakens in Europe. Heading into last week, investors questioned whether the weakening manufacturing sector would begin to bleed into the services sector. Flash manufacturing PMI data in Europe and Germany fell short of expectations and remain below 50 meaning the sector is experiencing falling output. Services PMI readings in Europe and Germany also failed to meet expectations but were close to prior levels and remain in expansionary territory. In the U.S., the manufacturing PMI modestly increased to 51.5 providing some cushion between the 50 dividing line, while the services PMI ticked up to 51.0.       

European Central Bank confirms recent policy adjustment. In Mario Draghi’s last meeting as ECB President, he reaffirmed policy decisions from September’s meeting including a rate cut and the restart of a program purchasing mostly government bonds beginning in November at a clip of €20 billion per month. Draghi pushed back against criticism on negative rates and the recent policy change, with a view that the easing was needed given the softening growth environment in Europe and trade risks. He also reiterated his call to European countries to help the economy through fiscal policy4.

Brexit deal wins approval but timing remains uncertain.  Last week, U.K. lawmakers approved the current Brexit deal, but did not agree to U.K. Prime Minister Boris Johnson’s accelerated timeframe to implement the deal. This led to Johnson seeking a general election to be held on December 12. Meanwhile, the EU has yet to agree on an extension date for Brexit. Despite the uncertainty, financial markets have been comforted by the very low likelihood of a no-deal exit on October 315.

Caterpillar cuts profit forecast for second straight quarter. Caterpillar (CAT), often viewed as an economic bellwether, missed earnings expectations citing global economic uncertainty dampening investment in heavy equipment.  In third quarter earnings season, 40% of S&P 500 companies have posted results with aggregate earnings growth of -0.5% year-over-year (y/y) and sales growth of 3.7% y/y. Those figures are ahead of consensus expectations by 4.4% and 1.3%, respectively6.

This Week Preview

Third quarter earnings season continues with communication services. Many of the companies reporting in the third week of earnings season will come out of the communication services sector. Those companies include Facebook (FB), Alphabet (GOOG) and AT&T (T). Companies from other sectors include Berkshire Hathaway (BRK/B), General Electric (GE), Apple (AAPL), Starbuck (SBUX) and Pfizer (PFE)7.

Federal Reserve expected to lower rates on Wednesday. After 25 basis point rate cuts in the July and September meetings, markets are anticipating another cut with 90% probability as measured by Fed funds futures. Federal Reserve Chairman Jerome Powell has stated that the central bank would act as necessary to sustain the economic expansion throughout 2019. Muted inflation combined with trade uncertainty and slowing growth especially in the manufacturing sector help support the case for lowering the Fed target rate to the 1.5% - 1.75% range. Investors will also be closely following the Fed’s messaging to determine the likelihood of a fourth cut in December8.

Job growth expected to slow due to GM strike. The labor market has been adding about 160k jobs per month in 2019 and remains a bright spot in the U.S. economy. A jobs added figure of 90k is expected in this Friday’s report, with much of the anticipated drop from the prior level driven by the strike at General Motors (GM). In other data this week, core Personal Consumption Expenditures will be released on Thursday.

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. Global Markets Weekly Update. T. Rowe Price. Retrieved on 28Oct2019 from https://www.troweprice.com/personal-investing/planning-and-research/t-rowe-price-insights/markets/global-markets-weekly-update.html
  2. 2. Lawder, David. Shalal, Andrea. Reuters. U.S., China say they are ‘close to finalizing’ part of a Phase One trade deal. Retrieved on 28Oct2019 from https://www.reuters.com/article/us-usa-trade-china/china-to-ask-u-s-to-remove-tariffs-in-exchange-for-agricultural-buys-in-talks-friday-idUSKBN1X40EF
  3. 3. Bloomberg, MSCI World Index returns 21Oct2019 – 25Oct2019.
  4. 4. Fairless, Tom. The Wall Street Journal. Mario Draghi, Hailed as the Euro’s Savior, Leaves the ECB With the Bank Divided. Retrieved on 28Oct2019 from https://www.wsj.com/articles/ecb-holds-steady-in-draghis-final-policy-decision-11571918124
  5. 5. Reid, David. CNBC. Here’s how Wall Street analysts see the big Brexit tangle unfolding. Retrieved on 28Oct2019 from https://www.cnbc.com/2019/10/23/heres-how-wall-street-analysts-see-the-brexit-tangle-unfolding.html
  6. 6. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 28Oct2019 from http://lipperalpha.financial.thomsonreuters.com
  7. 7. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 28Oct2019 from http://lipperalpha.financial.thomsonreuters.com
  8. 8. Bloomberg, Fed Funds Futures Index 28Oct2019. 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.


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Tags: Weekly Market Update