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Smartim Weekly Market Review

7th December 2018
Smart Investment Management 
The week to date as at 12 p.m. Friday (GMT).

Markets and key events

Global equity markets started the week positively as risk appetite received a boost from developments at the G-20 summit with US President Trump and Premier Xi hinting at a 'good' outcome to end the US-China trade war.  By the close of the summit, it was a sea of green across global equity markets as investors cheered the handshake truce between the US and China. At the same time, the market reassessed the risks related to future Fed monetary policy changes and the scaling back of hawkish Fed risks which compounded support for global stock markets. This momentum was not sustained in overnight trading in Asia suggesting that the market’s exuberance seen on Monday may have been a bit excessive.

On Tuesday, the post-G20 relief rally for global equities proved to be short-lived as doubts emerged about the durability of the US-China trade war truce and in addition,  financial stocks were unsettled by the continued flattening of the Treasury yield curve with the yield on the two-year Treasury note edging above that on five-year paper; this segment of the yield curve inverted for the first time in a more than a decade. Some analysts view an inverted yield curve as a warning about the prospects for the US economy and an inverted yield has historically been a precursor to a recession. The dollar continued its broad retreat as Treasury yields fell, and the Chinese renminbi registered its biggest two-day rally since 2005.

Global stocks remained in shaky territory on Wednesday following the rout on Wall Street on Tuesday with both European and Asian stocks closing in the red on the day, while the US stock markets were closed for a national day of mourning following the death of former President Bush. The Stoxx Europe 600 index slumped 1.2% and the FTSE shed 1.4% on the session as risk sentiment remained fragile post the steep sell-off in US equities on Tuesday. However, some positive news on the trade war front helped to steady nerves after China’s Commerce Ministry expressed optimism about reaching a trade deal with the US.

Thursday was a dramatic day across global equity markets following news that the CFO of Huawei Technologies had been arrested in Canada at the request of US authorities, stoking fears that this would derail progress on trade talks between the US and China. This set the tone for the rest of the equity markets on Thursday as both Asian and European equities plummeted. The Euro Stoxx 600 lost more than 3.3% on the session while the FTSE experienced a similar drop as risk-off trade firmly took hold. Over in the US, while the start of the day was dismal, a Wall Street Journal report that indicated that the Fed may turn more accommodative helped US stocks claw back losses which saw these stocks end the day only modestly lower. The turbulence sent investors scrambling for the safety of highly rated government debt, pushing the 10-year Treasury yield down to a four-month low of 2.82%, before settling at 2.90%, down 2 basis points for the day.

This morning, global stocks are on a firmer footing as the global sell-off sparked by the arrest of Huawei’s chief financial officer ran out of steam. European bourses rebounded, with London’s FTSE 100 regaining 0.7% and Frankfurt’s Xetra Dax 30 up 0.8%. Both had fallen by more than 3% over the previous session, the worst single-day losses since the immediate aftermath of the UK’s Brexit vote in June 2016.

Australia

A late rally at the end of the week, enabled the Australian S&P/ASX 200 to finish marginally higher over the week by 0.25%. Market gains have been experienced across the board on Friday, with Materials being the only negative sector. Among the strongest improvers on Friday are the “big four banks”, led by a 1.1% lift in Commonwealth Bank. Meanwhile the Australian dollar fell by 0.6% on Thursday, as Australia's third quarter GDP disappointed expectations, printing at just 0.3%, below expectations of a 0.6% reading.

Weekly Market Returns

As of 12pm London time, global equity markets as measured by the MSCI AC World are down 2.4%; in the United States, the S&P 500 has lost 2.3%.  In Europe, the FTSE 100 is down 2.6%, and the Eurostoxx 600 is down 2.9%.  Over in Asia, the Japanese Topix is down 2.8%, however the Chinese Shanghai Composite and the S&P/ASX 200 (Australia) have bucked the trend returning 0.7% and 0.25% respectively.  Emerging Markets as measured by the MSCI Emerging Markets are down 1.6%.

Bond markets fared better as negative risk sentiment drove investors out of equities and into bonds. The US 10-Year Treasury returned 0.71% over the week, 10-year German Bunds returned 0.56% and the 10-Year UK Gilt returned 0.87%. Similarly, gold had a strong week rising $20.90 per ounce returning 1.7% over the week.

Commodities

The price of Brent crude which touched a 13-month low last week, broke above the $60 per barrel mark at the start of the week to $62.41, as speculation mounted that OPEC (Organisation of the Petroleum Exporting Countries) and its allies would agree to cut oil production at their meeting in Vienna on Friday. Brent Crude rose by $1.50 over the period, ending the week up 2.6%

In Other news

This week, the UK Prime Minister, Theresa May, suffered three Brexit defeats in the Commons as she set out to sell her EU deal to sceptical MPs.  She was addressing the Commons at the start of a five-day debate on her proposed agreement on the terms of the UK's withdrawal and future relations with the EU.

The agreement has been endorsed by EU leaders but must also be backed by the UK Parliament if it is to come into force. MPs will decide whether to accept or reject it on Tuesday 11th December.

Conservative MPs supportive of the Government have launched a last-ditch effort to save Theresa May’s Brexit deal, by pushing an amendment that would give Parliament a vote before the UK enters any customs union backstop. Under the terms of the deal Mrs May agreed with the EU that the UK will automatically fall into a ‘backstop’ EU customs union should the Government fail to agree a new trading relationship with Brussels during the transition period.

Pressure is now mounting on Theresa May to delay next week's Commons vote on her Brexit deal after a number of cabinet ministers reportedly tried to persuade the PM to put off the vote, urging clarity on the controversial Irish border backstop. It comes as a legal challenge by a group of British expats hoping to halt Brexit because of "corrupt and illegal practices" by pro-Leave organisations will be heard by the High Court Today.