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Smartim Weekly Market Review

14th December 2018
Smart Investment Management 
The week to date as at 12 p.m. Friday (GMT).

Markets and key events

It was a volatile start to the week as markets digested the weaker than expected US jobs report. In Europe, developments related to Brexit dampened risk appetite and markets ended firmly in the red after Theresa May told parliament the vote on the Brexit deal, which was due to take place on Tuesday, would be delayed until further notice, causing Sterling to slump to its weakest level against the dollar since April 2017. European woes dampened the mood in Asia with markets ending the session firmly in the red.   Over in the US, markets managed to secure mild gains on Monday as reports suggested that China’s Vice Premier discussed a timetable for trade talks with US Treasury Secretary. 

On Tuesday, an initial bout of optimism that the US and China were making progress in resolving their trade dispute evaporated after Donald Trump threatened to shut down the Federal government over funding for a wall along the US-Mexican border. Mr Trump had tweeted earlier in the day that “very productive conversations” were ongoing with China, and this was accompanied by news that Beijing was preparing to cut tariffs on US car imports from 40 per cent to 15 per cent.

In Europe, concerns over the UK’s exit from the EU continued to unsettle markets as Brussels warned that there was “no room whatsoever” to renegotiate on Brexit. Sterling suffered further losses, hitting a fresh 20-month low against the dollar, with the selling gathering steam as reports emerged that Theresa May, UK prime minister, could soon face a vote of no confidence. Meanwhile, the recent unrest in France came into focus as worries grew that President Emmanuel Macron’s additional fiscal measures to quell the protests could result in Paris breaching EU fiscal rules next year. The spread between French and German 10-year bond yields hit the widest level for 18 months.

On Wednesday, equity markets were buoyed after Trump said in an interview that he would intervene in the arrest of Huawei’s CFO if it would help ensure a trade deal with China. US stocks ran out of steam in late trading but still managed to close higher with the Dow Jones up 0.6% and the S&P up 0.5% on the day.  The gap between two-year and 10-year US Treasury yields widened and the dollar index fell in part reflecting an impressive rally for sterling. The pound’s recovery from the previous day’s lows came as markets grew increasingly confident that Theresa May would survive a vote of confidence which she came to win by a margin of 200 to 117.

Asian equities ended the session firmly in the green as hopes of a US-China trade deal bolstered sentiment. Meanwhile, over in Europe, Theresa May’s commitment to brokering a Brexit deal and speculation that she would survive a no confidence vote in the evening sparked gains across European equity markets with the Euro Stoxx 600 and FTSE ending the session up by 1.7% and 1.10%, respectively. In Italy, stocks outperformed, and government bond yields fell sharply, after Rome confirmed that it was preparing to bow to EU demands that to lower its budget deficit target for next year.

On Thursday, caution prevailed across US and European stock markets as participants watched for any signs of progress in trade negotiations between Washington and Beijing and digested relatively downbeat remarks from Mario Draghi, president of the European Central Bank. The ECB confirmed it would end its net asset purchases by the end of the year as expected, but Mr Draghi otherwise sounded moderately dovish, saying he saw the balance of risks to the economy moving to the downside. The ECB also lowered its growth forecasts downward for this year and next and enhanced its forward guidance on reinvestment.

This morning, there have been no new concrete developments related to US-Sino trade talks, and risk sentiment has been knocked by some sluggish data out of China overnight It is also notable that retail sales grew at the weakest pace since 2003.  There are a number of signs confirming that the economic cycle in China has deteriorated and that the effects of an over indebted system are starting to make their presence felt with industrial output expanding by the narrowest margin in three years. Equities indices in Hong Kong, Shanghai and Shenzhen are down almost 2 per cent. European data sent similar signals, pointing to low growth in Germany and contraction in parts of the French economy. The Euro Stoxx 600 is down 1 per cent and the FTSE 100 has also fallen 0.9 per cent and US futures trade point to falls of 0.9 per cent for the S&P 500 at the open.

Focus will also turn to the US Federal Reserve (Fed) decision next week where the central bank is expected to lift US rates again before the end of the year. Whilst the December hike may be a foregone conclusion, the guidance on the rate trajectory post that, is uncertain. It is the uncertain guidance stance by the Fed that will keep investors cautious on how they will position themselves for the end of the year. So much in the way of rate hikes had been priced into US rate markets just a few weeks ago. Much of that has now been unwound since equity markets corrected and it is unclear whether there are more of those expectations to unwind.

Australia

Over the week the S&P/ASX 200 dropped 1.4%. Major banks were one of the main culprits for the decline. “Big four” bank Westpac fell 3.3% after shareholders voted down executive bonuses at the company’s annual general meeting. Other major banks also declined this week with Commonwealth Bank down 2.2%, ANZ 3.5% lower, and NAB down 1.3%. Elsewhere, materials was the only sector to advance, up 1.5% for the period, as miners continue to benefit from recovering iron ore prices.  The price jumped up to $67.26 per tonne as of 12pm London Time.

Fixed Income

Overall, the yield on the US 10-year treasury, which moves inversely to its bond price, remain mostly unchanged from last week, at 2.89%. Given the political uncertainty over the parliamentary Brexit vote, UK 10-year gilts rallied strongly on Monday, falling as low as 1.16% before closing at 1.20%, down 7 basis points on the day. The 10-year gilt yield is now trading higher at 1.26%.

Commodities

It was another variable week for oil prices. Brent crude oil initially fell back below $60 per barrel but managed to regain its losses after reports on Thursday that Saudi Arabia was preparing to cut oil imports to US refiners next month. Also supporting price gains was the International Energy Agency monthly report which has forecast OPEC's (Organisation of Petroleum Exporting Countries) oil production could decline more than originally expected during the first quarter of 2019 with unplanned production losses coming from Iran and Venezuela. As of 12pm London time, Brent crude is trading at $60.91.

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 has a strong week rising $20.90 per ounce, returning 1.7% over the week.