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.

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