Equity markets have started the year like most New Year’s resolutions - in a positive and resolute fashion. Markets have been boosted by the promising start to US-China trade negotiations and a US Federal Reserve (Fed) that looks increasingly likely to slow down their approach to interest rate rises. That cheery mood is likely to be tested this week by the start of the fourth quarter earnings season in the US and a busy political calendar.
If you were hoping for a quiet start to the year, last week will have left you bitterly disappointed as some weak economic data complemented by heated US politics resulted in a volatile first few trading sessions of 2019.
As we reach the end of the year it is becoming increasingly likely that the much fabled ‘Santa Rally’ may not be joining financial markets this festive season. Risk sentiment amongst investors has taken a nose dive while the global political elite continue to find ways to unnerve their electorate. Unsurprisingly this backdrop has led to a particularly weak period for asset prices, both equities and bonds, with investors now questioning whether 2019 will be a profitable one.
Investors are waiting anxiously in hope for this year’s “Santa Rally” to arrive, with equity market rallies of late struggling to find legs. It’s difficult to know if this week will provide the tonic markets desire, with US-China trade tensions and the UK parliamentary vote likely to continue to weigh on investor sentiment. Whilst politics is likely to take the bulk of the headlines, it’s also a busy week on the economic front with China releasing a number of key economic indicators for November and the European Central Bank (ECB) holding its last monetary policy meeting of the year.
Federal Reserve (Fed) governor Jay Powell is scheduled to speak before Congress’s Joint Economic Committee on Wednesday. Considering the market-moving comments he made last week (more on that below), it is worth paying attention to see how he builds on them and whether the tone is as dovish.
A fairly quiet upcoming week for global economic data, naturally the same can’t be said for global politics in the current climate. The release of the German IFO business climate index this morning confirmed an economy that appears to be weakening, whether this is temporary remains to be seen. We will be looking for more detail to assess the state of the German economy when we receive both unemployment and inflation data for November on Thursday. The unemployment rate is expected to remain steady at 5.1% while inflation is expected to tick up marginally to 2.5% (year-on-year).
With it being Thanksgiving week the amount of key economic data to be released is limited. Instead, focus is expected to remain on the latest Brexit developments and US trade tensions.
We have written on many occasions about how inflation remains the missing ingredient in the global economic recovery. And so again this week markets will be focused on global inflation reports with central bankers hoping for some signs of life if they are to have more conviction as they tighten monetary policy. This is especially true for the US where the Federal Reserve have embarked on interest rate rises whilst inflation has been neither ‘too hot nor too cold’, implying something of a goldilocks scenario for policy makers. After a weak print in September, analysts expect the October CPI headline reading to tick back up to 2.4%.
Ever since the changing of the guard at the White House back in November of 2016, commentators have constantly speculated over whether gyrations in global equity markets have been determined by the words, and sometimes actions, of US President Donald Trump. This week brings the mid-terms, a measure of how much support he has maintained since that fateful night just under two years ago. History would tell us that the period immediately after a mid-term election is typically a bullish one for the US equity market, yet this time things do feel very much different.
Equity markets took another beating last week, with the S&P 500 hovering around correction territory, i.e. a 10% fall from its recent peak. Market corrections should not be too surprising given that statistically they happen, on average, once a year. What has surprised us, however, is the fact this correction has occurred during a period where US companies are reporting annual earnings growth, on average, of over 20%. It seems to us that these stellar earnings have intensified end of the cycle fears as they have most probably peaked now as the tax cuts start to fade out as we move into 2019.