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Smartim Weekly Market Review

30 November 2018
Smart Investment Management 
The week to date as at 12 p.m. Friday (GMT).

Markets and key events

Global equity markets recovered a little poise this week, as a number of factors came together, bringing some optimism.  Brent crude rose above $60 on Monday, having fallen more than 30% from its October peak. Hopes were raised that trade tensions could be alleviated between China and the US at the upcoming G20 meeting on Sunday.  Signs emerged that the Italian government may be prepared to compromise on its budget standoff with the European Union, the UK’s Brexit deal was approved by the European Council, and rumours emerged that the European Central Bank is considering longer term refinancing operations, designed to support lending in the eurozone.  This was further supported by Jerome Powell, chairman of the US Federal Reserve, stating on Wednesday that interest rates were not on a pre-set path, and that rates were close to the “neutral” level, neither stimulating nor hindering economic growth.  This led both the S&P 500 and the technology focused Nasdaq to jump 2.3% and almost 3% respectively on Wednesday alone.

However, by Friday, ahead of the G20 meeting on Sunday, an air of caution returned, as investors await the outcome of discussions between President Trump of the US and Xi Jinping of China on trade policy.  To strengthen his hand ahead of the meeting on Tuesday, President Trump threatened to impose tariffs on an additional $267bn worth of Chinese goods if no agreement is reached.  As things stand, the rate of tariffs on $200bn worth of Chinese goods is due to increase from 10% to 25% in January.

Against this backdrop, global equities rose 3% over the week, with the US S&P 500 rising 4%, up to 12pm London time on Friday, whilst the Nasdaq rose 4.8%.  Emerging market equities rose 3%, with China a notable laggard, as the Shanghai Composite only managed to rise 0.3%.  Meanwhile, the Japanese Topix index managed a very credible 2.4%.  However, things were not quite so positive in Europe, with the EuroStoxx 600 and the UK’s FTSE All Share only managing 0.7% and 0.4% increases respectively.  Despite the EU agreeing to Prime Minister Theresa May’s Brexit agreement, the proposal is expected to have a much rougher ride through the UK’s parliament, with a vote due on December 11th.

The Australian S&P/ASX 200 stood out this week for all the wrong reasons, as the index declined by 0.9%. Losses were broad based, with consumer staples the worst performer over the week, led by Coca Cola Amatil which slumped 14.5% after the announcement the company would sell their loss-making fruit and vegetable business. Financials stocks managed to finish the week higher by 0.2%, but the big four banks slumped at the end of the week, all falling between 1-2%.

Issues under discussion

Our expectations in recent months have been of rising inflation in the US but of it not running away. Although one swallow does not make a summer, the US Federal Reserve’s preferred measure of inflation (core personal consumption expenditures price index) came in unexpectedly low this month at 1.8%, the weakest reading since February and down from 2% in September, which is also the Fed’s target level.  This coincided with both the chairman of the Fed, Jerome Powell, and the vice chairman, Richard Clarida, open to the idea that the neural interest rate may be lower than previously, which is what we have argued in a world that remains heavily indebted.  If the US dollar starts to roll over, this would be positive for risk assets, and may help set up a rally into the year end.  However, for now, markets are solely focused on the G20 meeting, and the outcome of President Trump and Xi Jinping’s discussion on trade.