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. Brent crude fell below $70 a barrel on Friday, falling -3.6% in a fifth straight week of declines from when it peaked on the 3rd October at over $86 a barrel.
The midterms played out mostly as anticipated with the Democrats claiming 52% of the House and the Republicans retaining a 51% majority in the Senate (still a few seats to be declared in both races). The split in power was a boon to markets: more apprehensive that either Republicans would go too far in tax cuts and further deregulation, or a jolting reverse of recent Trump stimulus by the Democrats along with greater potential to impeach the President. The split removes this need to trust politicians, now they are likely to face two years of legislative gridlock ahead. Politico commented, “A Democrat-controlled House dims the prospects that the White House will successfully spearhead any major legislative initiatives in the next two years — and increases the chances the White House will focus more on politics than policy.” Legislative gridlock certainly doesn’t put brakes on the campaign trail but at least for now focus has shifted again to US trade talks with China and budget disputes between the European Commission and Rome; both should continue to unfold in the coming weeks.
Slower growth with increased risks and uncertainty was a common theme in the European Commission’s Autumn 2018 Economic Forecast and the IMF’s Regional Economic Outlook for Europe. Both look for a deceleration in the rate of growth in the Euro Area: the IMF forecasts growth of 2% in 2018 falling to 1.9% in 2019 and 1.7% in 2020. The EC is slightly more optimistic with Euro area growth of 2.1% in 2018 but also has growth falling to 1.9% and 1.7% in 2019 and 2020. The IMF noted that ‘the external environment has become less supportive and is expected to soften further in 2019 owing to slowing global demand, trade tensions, and higher energy prices. Tighter financial conditions in vulnerable emerging market economies and maturing business cycles are also weighing on activity.’ They also cited risks from factors such as delayed fiscal adjustment and structural reform along with demographic challenges and warned that a ‘no deal’ Brexit would have negative consequences for growth.
Looking to the week ahead the US begins quiet with Veterans Day on Monday but crams in a full week of data with the US Federal Budget, German ZEW and Japan GDP on Tuesday; US and Eurozone CPIs on Wednesday alongside Japan industrial production; US and UK retail sales on Thursday; and US industrial production on Friday.