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. Despite the ongoing geopolitical concerns and the bout of weak Chinese trade data that affected markets earlier in the week, the trade optimism and news of China’s economic and monetary stimulus plans had a greater impact on market valuations. The recent cuts in the reserve requirement ratio and plans for further liquidity injections assuaged market concerns. European markets also rallied: on predictions that the catastrophic defeat of May’s Brexit proposal by a 230 vote margin (the largest margin in history) plays into the hands of those fighting for stronger economic ties with the European Union, either through an extension to Article 50 or a version of ongoing customs union arrangement.

Brent crude bounced a further $2.22 per barrel with prices closing the week at $62.70, now over 25% higher than the lows seen towards the end of 2018. Markets now expect prices to remain a little more stable around the $60 mark with OPEC’s recent cuts in output proving notable in the reduction in global surplus supply. The latest cut saw output reduced by 751,000 barrels per day between November and December with Saudi Arabia driving the adjustment with a reduction of 468,000 barrels. Further signs of increasing risk tolerance were also seen across emerging markets, which saw over $3 billion in new inflows last week.

This week sees China GDP, industrial production and retail sales data on Monday as well as Germany producer price index but the focus will be on UK Prime Minister Theresa May addressing Parliament with her Brexit Plan B. The World Economic Forum starts on Tuesday in Davos which this year seems to have been overshadowed by current events with the notable absence of US and UK heads of government: busy with their domestic political dramas. On Wednesday we have the Bank of Japan rate decision, Eurozone consumer confidence and US retail sales data. PMI flash data for the Eurozone and US are published on Thursday along with the European Central Bank interest rate decision. As Davos wraps up on Friday we’ll see consumer and business climate data across Europe, durable goods from the US and Tokyo CPI data.

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