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. Scepticism and bearish sentiment also prevailed in the bond market with 10-year and 30-year US Treasury yields falling 14 and 15 basis points to 2.85% and 3.14% respectively, marking the fifth straight week of declining yields. At the shorter end, the Treasury curve also inverted with the 2-year and 5-year yields closing the week with a minus 2 basis point term-spread at 2.69% and 2.71% respectively. The 2-10 term-spread closed at just 13 basis points compared to an average for the year of 40 basis points – a long long way from the 264 basis point term-spread from 5 years ago.

Despite the day off for the funeral of President George H. W. Bush, last week saw a number of Fed speeches along with the Fed’s Beige Book which highlighted a broadly growing with signs of softening activity in some states and sectors; there are concerns over a stagnating housing market and rising wages. Jobs and wage data was released on Friday with Non-Farm Payrolls for November at 155k below the forecasted headline of 198k; this along with a two month net revision to previous data of -12k. The unemployment rate was stable at 3.7% with average hourly earnings at 0.2% on the month making the year on year rate at 3.1% weaker than expected and a supporting factor for the recent fall in yields across the curve.

In the UK the debate to precede the “meaningful vote” on Brexit began atrociously last week, with Prime Minister Theresa May suffering three defeats in the House of Commons. This included the Cabinet and Attorney General Geoffrey Cox being found in contempt of Parliament as they sought to balance “conflicting constitutional issues”. Sir Keir Starmer, Labour's shadow Brexit secretary, argued that by not releasing the advice "the government is wilfully refusing to comply with a binding order of this House, and that is contempt.” MPs voted by 311 to 293 votes as the DUP backed the motion which condemned the withholding of the “full and final” legal advice and “ordered its immediate publication”. Then as it became apparent that May would almost certainly lose a Parliamentary vote on the deal this coming Tuesday news came from the European Court of Justice that Britain can cancel its notification to withdraw from the EU without prior consent from the other EU members.

Also last week, the European Union unveiled plans to challenge the US dollar’s dependence in global markets by strengthening the international role of the Euro, with the longer term view of ‘de-dollarising’ the world economy. At the launch, Pierre Moscovici, the EU economic affairs commissioner believed ‘A wider use of the euro in the global economy yields important potential for better protecting European citizens and companies against external shocks and making the international finance and monetary system more resilient’.

This week on Tuesday the House of Commons is due to vote on Brexit (at the time of writing), the UK releases Trade and unemployment data and Germany publishes its ZEW economic sentiment indicator; Eurozone industrial production and US CPI on Wednesday; Germany and France CPI on Thursday along with the ECB’s interest rate decision; and on Friday China releases a slew of economic data and Markit publishes their flash PMIs for across Europe.

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