The Weekly Update

Both stocks and bonds were on the front foot last week after US core inflation data came in up just 0.1% month-on-month, further relieving any lingering fears of immediate runaway inflation. The year-on-year core figure came in at 2.1% (0.1% below expectations and the previous month’s reading) while real average hourly earnings were up 1.9% yoy. The S&P 500 ended the week up 2.9% while US 10-year Treasury yields rallied 4 basis points to 2.59% - pushing below 2.6% for the second time this year (after flirting with such low yields for a day early in January) but this time falling yields come even as USD 24bln in supply was swallowed up by a bond hungry market. Indeed duration buyers were seen in the long dates as some frustrated investors are thought to have bitten the bullet and need to get some maturity risk on board ahead of this coming week’s FOMC meeting.

In Europe last week, the EU announced it was holding back the next phase of Greece’s debt relief as the government had so far failed to fully implement reforms that it had promised during the huge bailout that ended in August last year. As part of the debt relief scheme, Greece was due to receive approximately  EUR 1bn, however, according to the EU, the Greek government has so far not completed new housing insolvency rules for those threatened families with foreclosure on their homes. Pierre Moscovici, the EU Economics Affairs Commissioner said ‘It's too early to decide formally on the disbursement today’ adding ‘The signal given to the markets is decisive, the message of today's Eurogroup will be and must be positive’.

In the US, the summit between President Trump and Xi was pushed back while trade negotiations continue, but Trump said the negotiations are ‘going incredibly well’ while China’s state news agency pointed to ‘substantive progress’: the market is still expecting a deal to resolve the impasse. However, the US hard-line approach to trade and tariffs looks likely to continue with the US likely turning their attention to other trading partners.

Meanwhile the three days of Brexit votes and parliamentary predicament evolved mostly as expected with MPs voting against May’s deal and no-deal and for an extension. But the amendments that stood and fell (some by the smallest of margins) were perhaps just as important. 312 MPs voting for and 314 against parliament taking control was almost an ironic echo of the Maastricht debates, which was the last time a Speaker had a casting vote. Had the (observed fist-bumping) Tory Whips persuaded just one less MP this would have happened; two less and not even Speaker John Bercow could have saved what’s left of May’s governing authority. Still the amendment tabler Hilary Benn has every intention of trying again. But with time ever more in May’s hands it is expected that she will try to win over the DUP and then some of the ERG with further concessions upon her already weak position: to force the scales for a third meaningful vote in her favour (if you could even call it that). But MPs that have described the incremental advances in the EU-UK deal akin to “polishing poo” won’t easily surrender to having it force fed to them. From the opposite angle, Corbyn may be the one to watch having more to lose than most if May gets her deal and much to gain if he can drive through whichever one of the agendas he has supported throughout this ordeal. Only time will tell, as it stands, with 11 days and counting left on the clock.

Data for the week ahead includes: Eurozone trade balance and Japan industrial production on Monday; UK unemployment, Germany ZEW economic sentiment, US factory orders on Tuesday, as well as a possible 3rd meaningful Brexit vote on May’s deal; Wednesday focus will be on central banks’ data with the Fed interest rate decision and BoJ minutes, also on Wednesday is Germany and UK inflation data; The BoE’s rate decision appears on Thursday along with UK retail sales and PSNB, and Eurozone consumer confidence; lastly on Friday we have CPI from Japan and Canada and Markit PMIs throughout the Eurozone.

The Weekly Update

The Weekly Update

Risk-off assets including higher-grade bonds were favoured last week as US 10-year Treasury yields fell 13 basis points to 2.63% while US equities lost momentum: with the S&P 500 falling -2.2% after almost ten straight weeks of gains this year (with one -0.2% week in January). While the US Fed was busy receiving another string of criticism from President Trump the ECB was busy issuing some dovish guidance and detailing new TLTROs for September providing a boost to Italian debt markets. Broader negative sentiment could not be avoided with numerous downward revisions to global growth forecasts in addition to weak data from US manufacturing ISM and the Fed’s Beige Book release detailing the economic drag from the government shutdown.

The Weekly Update

The Weekly Update

Last week global markets began with equities on the front foot with further announcements that a detailed trade deal between the US and China is near completion; the Chinese CSI 300 was up +6% on Monday alone and rallied further to close out the week. Other global equities were also positive performers with the S&P 500 up +0.4% making the ninth week out of the ten this year to yield a positive return. In addition to the positive statements over a potential trade deal, Fed chair Powell reiterated the FOMC’s willingness to be patient before any further rate hikes, and data last week (including US GDP and China PMI) exceeded their (meagre) expectations. US 10-year Treasury yields rose 10 basis points to 2.75% - remaining within the 2.60-2.75% range they have traded on for most of 2019 thus far.

The Weekly Update

The Weekly Update

Another week of mixed data, another positive week for equities with the S&P 500 up 0.62% whilst US 10-year Treasury yields held around 2.65%. The week began with a cloud over EU growth prospects with Francois Villeroy de Galhau, an ECB Council member warning that the slowdown in the EU economy over the recent months has been ‘significant’, to the extent that if it becomes clear it’s not a temporary blip, the ECB will have to change its forward guidance.

The Weekly Update

The Weekly Update

Last week, the Dow Jones Industrial Average was again up a full +3.1% on indications Trump may allow some concessions and extensions on both the international trade talks and border wall funding disputes; the former would otherwise revert to higher tariffs on the 1st March. The latter avoided another federal government shutdown over the weekend: but only through the Republican Senate agreeing to fund around a quarter of the border wall expense and Trump declaring a national emergency to divert funding for the rest.

The Weekly Update

Last week we had a quiet start with a lot of Asia out due to the Chinese New Year. We started the week with warnings from Ignazio Visco, the Bank of Italy’s Governor, warning of the downside risks to the central bank’s forecast for economic growth after the nation slipped into a recession in the last quarter of 2018. The recession, Italy’s third in a decade comes as the bank’s latest growth projection of 0.6% GDP growth for 2019 and 1% for 2020 start to look optimistic, in spite of being in-line with national and international forecasters. Visco acknowledged ‘The prospects for the Italian economy are less favourable today than they were a year ago’ adding there are ‘significant risks on the downside’.

We also heard a cautionary note from Dallas Federal Reserve Bank President Robert Kaplan, saying he believes the U.S. central bank will hold off on rate increases until at least the summer. "It's very important for the Fed to get out of the way" and let uncertainties around the economy resolve themselves before weighing any more changes in monetary policy, Mr. Kaplan said at a Friday appearance at the Texas Lyceum, in Austin.

President Trump called for bipartisanship in his State of the Union address — on his terms. He urged immigration compromise while casting his fight against illegal migration as a moral struggle — not a national emergency. He gave Dems no new incentives to break the wall funding impasse. He'll hold talks with North Korea's Kim Jong-Un in Vietnam February 27-28. Financial markets shrugged.

Senior U.S. and Chinese officials were poised to start another round of trade talks in Beijing this week to push for a deal to protect American intellectual property and avert a March 2 increase in U.S. tariffs on Chinese goods, two people familiar with the plans said on Tuesday. In December the US delayed a threatened tariff increase to 25% on $200bn of Chinese goods until March 1 to allow time for negotiations to take place.

Both the EC and the Bank of England slashed their growth forecast for this year, blaming a plethora of ongoing concerns, from trade frictions and a slowdown in China to political instability and the ‘fog of Brexit’. The EC now believes that the EU economy will grow by just 1.3% the year, down from the 1.9% it forecast only 3 months ago, whilst the BoE believes the UK will fair slightly worse at 1.2% growth, down from the 1.7% predicted in November.

And finally, Donald Tusk, the European council president, has said there is a ‘special place in hell’ for politicians who promoted Brexit ‘without even a sketch of a plan’, while he reiterated the EU’s refusal to renegotiate the withdrawal treaty.

This week focus will be on inflation with CPI and PPI in the US alongside retail sales, IP and capacity utilisation. Little is scheduled for release in Europe, however, UK, RPI, CPI and PPI will be of interest given the economic weakness of Q4 and Thursday we get German GDP and EU Industrial Production.

The Weekly Update

Despite last week being the busiest for corporate earnings – with 41% of S&P companies reporting fourth quarter results – it was again the Fed that moved global stock and bond markets the most. The S&P 500 resumed its rally, up a further +1.6%, whilst the Fed’s new dovish tone was also a boost to emerging markets with the MSCI EM Index up +1.7%. US Treasuries also rallied on the Fed announcement with 10-year yields falling 7 basis points. Passing month end on Thursday, the S&P was up +7.9% YTD making it the best performing January in three decades; this was despite flags over growth in China not only from official statistics like weak industrial profits but also from a number of corporate earnings misses (like Caterpillar’s latest) blaming “lower demand” from China as the main reason for the shortfall.

As expected, the Fed left interest rates unchanged at its January meeting and the accompanying statement was viewed as having a dovish tilt as it pointed to a pause in the tightening cycle and prompted market debate whether the US rate-hike cycle has peaked. Jerome Powell also adopted a dovish tone in the press conference acknowledging ‘the case for raising rates has weakened somewhat’ and inflation risks ‘appear to have diminished’.  He also noted ‘our policy rate is now in the range of the committee's estimates of neutral’ and ‘we think our policy stance is appropriate’. US equity markets rallied in response, Treasury yields edged lower and the US dollar index (DXY) weakened.

The FOMC also issued a statement on the balance sheet normalisation noting ‘The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.’ However, they emphasised a flexible approach to balance sheet normalisation and ‘the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet,’ if it were required. The shift to a ‘patient’ stance by the Fed should further support US Treasuries and high grade bonds which have rallied strongly over the past 3 months with 10 year yields falling from 3.24% on 8th November down to 2.68% currently.

Over in Europe, Italy data showed it had entered into recession in the second half of 2018 as it also posted weak manufacturing PMI of 47.8 in stark contrast to the impending “economic miracle” purported by its populist leaders; Brexit negotiators on both sides paid their tribute to Groundhog Day by spouting the same demands as they have for countless weeks; meanwhile, both China and US continue to espouse optimism and progress in trade talks with scant details other than China buying (a couple of million) tonnes of soybeans from the US.

Looking to the economic data expected for the week ahead: on Tuesday we have service PMI data across the EU, UK and US as well as Eurozone retail sales with German factory orders on Wednesday. Thursday sees interest rate decisions from the Bank of England (with its inflation report) and Reserve Bank of India as well as a more closely watched Germany industrial production reading and France trade balance data; with France industrial production and Germany trade balance data on Friday.

The Weekly Update

The Weekly Update

Last week, IMF global growth forecasts for 2019 were revised lower again with notable slowdowns in Germany, Italy and China. The underestimated challenges of reaching specifics on a trade agreement between US and China were highlighted by Wilbur Ross, US Trade Secretary, perhaps trying to dampen expectations ahead of the forthcoming US visit of Vice Premier Liu He. Resolving contrasting intellectual property attitudes, for example, continues to prove infinitely more difficult: in contrast to recent progress on simpler issues that have often come with overblown press statements.

The Weekly Update

The Weekly Update

Last week the US government shutdown and the UK’s Brexit fiasco continued to get messier but US stocks extended into their fourth week of gains with the S&P 500 closing the week at 2,671 up +2.9% and the Dow up +3% closing at 24,706; meanwhile, US 10-year Treasury yields rose 8 basis points to 2.785%. Much of this return to risk and into equities continued to be driven by signs of modest progress and media statements out of the US-China trade talks with more to come as Vice Premier Liu He flies to the US at the end of the month.

The Weekly Update

The Weekly Update

Last week global equities continued their 2019 gains making the three week rally one of the strongest starts to the year in over 30 years – mostly due of course to one of the worst ends to the year in the three weeks ending 2018; the S&P 500 was up a further +2.54% on the week pushing the bounce since Christmas Eve above +10%. Also, on the back of wide-reaching optimism on the Sino-US trade negotiations and the Fed’s increasingly cautious tone and promise to be patient with further hikes, the Chinese yuan had its strongest week since 2005 with both CNH and CNY appreciating over +1.5%.

The Weekly Update

This week China built upon recent efforts to curb the escalating protectionism by reducing customs duties (on cars) and increasing imports of commodities; Trump went so far as to temper his nationalist invective for a few days and refrain from further threats on China. Nevertheless, US equities continued downwards with the S&P 500 down a further -1.26% and closing the week below 2,600 for the first time since March. This pushed returns for the year into negative territory with the price index down -2.76% for 2018. Now down 340 points since a peak in September the S&P 500 would still need to fall a further 250 points to around 2,350 to enter technical bearish territory (like the German DAX: which breached the -20% level earlier this month thanks in part to Deutsche Bank). The poor recent performance in Europe was further accompanied by a weaker growth outlook for 2019: with the ECB this week cutting forecasts for the Eurozone from 1.7% to just 1.5%.

After five straight weeks of strengthening US 10-year Treasuries sold-off 4 basis points closing the week with yields of 2.89%, with the long-end unchanged at 3.14%. The US dollar strengthened 1% according to the DXY Index which closed the week at 97.4. However, strong headwinds remain for any further strengthening in the dollar as market sentiment is clearly reflecting a greater uncertainty in the rate path for 2019. Implied probabilities are now showing more than a one-in-four chance that rates remain unchanged this Wednesday and a 48% chance that there will be just one rate hike or less in the next 12 months (including the one expected this week). According to these Bloomberg calculations there is effectively less than a 17% chance that we’ll see a hike this week as well as two additional hikes in 2019 to 2.75-3%. This is a long way off, and by no means an accurate forecast, but the barometer strikes a stark contrast from 2 months ago: when the implied probability for the Federal Funds Target Rate being in this range was above 58%.

Across the pond in the UK, Prime Minister Theresa May delayed the scheduled Parliament’s vote on her Brexit deal which helped spark a move of no confidence in her leadership and driving more than 37% of her own party to declare her unfit for continuing in her position. But this fell short of the 158 simple majority needed with 200 Conservative MPs against a change of leadership at this time. However, Theresa May later announced she would leave (before the next general election that is).

Emerging Markets continued to benefit from a recent bounce with the JP Morgan EMBI+ up 0.6% in a third consecutive positive week. Mexico benefited noticeably from the bounce with longer dated Pemex bonds up 4.4% on the week. Furthermore, in his federal budget to Congress Mexican President Andres Manuel Lopez Obrador proposed a 26% increase (to $10.4bn) for its investment in exploration and production for 2019 and a total budget of $23bn (464.6bn pesos).

In the week ahead, Eurozone CPI data is published on Monday along with some US and UK house price data; focus on Wednesday will be on the Fed interest rate decision but will also see various UK, and German inflation data and Japan’s trade balance; the BoJ and BoE both follow the Fed with their interest rate decision on Thursday; lastly Friday will see US durable goods and Eurozone consumer confidence data along with numerous final reads on Q3 GDP.

The Weekly Update

The Weekly Update

Markets opened the week with news that China and the US had agreed to a trade war ceasefire over the weekend at the G20 meeting. But the boost in US equities lasted not even as long as the conference itself and fell back around recent lows; the S&P 500 has now tried three times, since the October equity cliff edge, to push meaningfully above the 2,800 and for a third time fell approximately -6% to around 2,630.

The Weekly Update

The Weekly Update

US Treasury yields fell 5 basis points last week, which was just enough to bring them below 3% to close out November.  The November FOMC Minutes emphasised that ‘monetary policy was not on a ‘preset course’, it should be ‘guided by incoming data’ and that ‘a gradual approach’ remained appropriate. Another 25 basis point hike in the Fed Funds target range in December still looks extremely likely as ‘almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon’ assuming no drastic change in the job and inflation data.

The Weekly Update

The Weekly Update

US Treasury yields across the curve fell 1-2 basis points on the week with 10-years closing at 3.04%: ebbing back towards the 3% level for the third week in a row. The stable US Treasury markets contrasted widening spreads in emerging market and high yield debt by 14 basis points, referencing the JP Morgan EMBI+ and Bloomberg Barclays US Corp High Yield. Furthermore global equities endured another challenging week with the S&P 500 down a further -3.8%. After the painful -7% in October, the index seemed to bounce with optimism in the first half of November, but this has now been erased moving into the closing week of November.

The Weekly Update

The Weekly Update

Equities were on the back foot again last week with the S&P down -1.6% and the MSCI World down -1.5%. The US dollar also broadly declined with the DXY Index down 0.5%; but this didn’t stop sterling from weakening a further 1.1% versus the dollar as Theresa May’s Cabinet and support fell to pieces as she fought to push forward with the current negotiated deal with the EU. It seems the Cabinet agreed to the terms under duress and with the expectation it would get shot down in Parliament.

The Weekly Update

The Weekly Update

Following the October rout, US equities continued their bounce into a second week of >2% gains while US Treasuries also rose with 10-year yields falling 3 basis points to 3.18% and 30-year yields falling 7 basis points to 3.38%. European and Japanese equity markets were comparatively flat on the week while the Chinese CSI 300 and Hang Seng sold-off -3.7% and -3.3% respectively. The dollar strengthened towards the end of the week following the results of the US midterms with the DXY Index up 0.4%; also the Fed maintained rates as expected.

The Weekly Update

The Weekly Update

Last week US equities broadly retraced over half of the previous week’s losses with the S&P 500 closing up 2.4% at 2,723; US 10-year Treasury yields rose nearly 14 basis points to 3.21; but Emerging Markets were the most obvious winners with the MSCI EM Index up 6.1% on the week, breaking the run of five consecutive negative weeks’ of performance.

Last week began with results from elections in Brazil where far-right candidate Jair Bolsonaro was voted in as the next Brazilian President securing 55.1% of the vote.

The Weekly Update

The Weekly Update

It was another volatile market for equities with the VIX jumping to 27.5, after having remained steadily around 13 for all of September. US Treasuries did what they were supposed to, 10-year yields rallying 12 basis points to 3.076%. Even with 3.5% Q3 GDP beating forecasts, US equities led on the downside. The S&P 500 fell 109 points to 2658 on the week and the MSCI World Index absorbed similar losses of -3.9%. By Friday morning the -4% fall in the S&P 500 brought the Index into correction territory: when downside exceeded -10% from highs on the 21st September.

The Weekly Update

The Weekly Update

Although quite volatile again, the S&P 500 ended last week unchanged from the week before at 2767, US 10-year Treasury yields closed the week at 3.19% (+3bps) and Italian 10-year bonds were slightly stronger by week-end but only after yields touched fresh highs of 3.8% earlier on Friday. The FOMC minutes showed some small changes in terms of overall stance. From a more hawkish tone a wording change from “accommodative” to “restrictive” and speaking of the possibility of raising interest rates above the anticipated “normalization” rate pushed-up average estimates for where the upper bound might be for short-medium-term interest rates.

The Weekly Update

A shorter week in US markets with Columbus Day along with a light economic calendar didn’t stop a sharp sell off in equities: that began in the US but spread through global markets with little warning or a clear primary cause. The S&P 500 fell 5.4% with technology, industrials and commodities bearing the brunt of the sell-off. Consumer staples and other defensive stocks faring better points more to trade tension and macroeconomic fears rather than interest rate concerns. US 10-year Treasury yields retraced downwards 22bps on the week to 3.16%. Brent crude topped $85 a barrel earlier in the week but dipped back below $80 on Friday before being pushed-up again over the weekend as disputes resurfaced between Saudi Arabia and Turkey. Also on the last day of Golden Week in China, the PBoC cut the reserve requirement ratio by 100bp.

The Italian government and their proposed budget continued to be punished by the bond market pushing ten-year yields up through 3.50%, levels not seen since early 2014. Moreover Italian banks, with their €260bln in non-performing loans of the reported €2trln of loans held, own €102bln of outstanding loans and guarantees in the construction industry. Broadly, three of the largest builders are either insolvent or negotiating with creditors, with the construction sector already accounting for the highest default rates in the Italian economy. The problem in construction stems from years of tightening public spending that has ensured the once extremely lucrative government infrastructure contracts have dried up in the weakening economy. In fact, infrastructure spending has fallen 70% over the last ten years according to the University of Turin. Combine the construction industry financial problems with rising government bond yields of which the banks reportedly have holdings of around €375bln, and it is clear to see bank balance sheets are being severely pressured with very little available to help alleviate the strains.

Also last week the IMF published its Global Financial Stability Report which marked 10 years since the Global Financial Crisis. The report, titled “Are We Safer?”, highlighted how “short-term risks to the financial system have increased somewhat over the past six months” but also “new standards that have contributed to a more resilient financial system—less leveraged, more liquid, and better and more intensively supervised”. This tension between improvements in policy but much less-so in fundamentals support the reports view that “asset valuations remain stretched across several sectors and regions” and that “risks could rise sharply” across fragile economies through the likes of: escalating trade tensions, no-deal Brexit, renewed concerns over-indebted euro area fiscal policy and a faster-than-expected normalisation of monetary policy.

Looking ahead, on Monday we get data on US retail sales whilst the Italian government look to approve their latest budget, China CPI and UK employment data Tuesday, UK and EU CPI followed by Fed minutes on Wednesday, with China GDP and Japan CPI being published on Friday. Also it continues to be another busy week of earnings reports ahead as well as Brexit negotiations (or at least news about lack of negotiations).

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