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.
The quarterly earnings results from US companies have always been a key driver of investor sentiment. Amid all the concerns over the outlook for global growth and a deceleration in earnings growth, this set of quarterly results has an added level of significance. This week sees 35 S&P 500 companies set to report results, including global banks JP Morgan and Goldman Sachs. The banks’ lending data should give a useful indication into consumers and businesses appetite for borrowing as well as their overall credit risk, providing a helpful steer into the underlying health of the global economy. However, whilst last quarter’s results will receive close attention, company’s guidance for earnings in 2019 will be the primary focus for attention.
Politics remains in the spotlight with the US government shutdown entering its 24th day – making it the longest Federal closure in the country’s history. Whilst previous shutdowns have had only a marginal impact on economic growth, the longer the government remains closed, the more incoming data gets distorted and the harder it is to establish trends. As key government agencies are closed, scheduled economic data releases are at risk of being delayed. However, if published, it’s a busy week with retail sales and housing figures from the UK and US likely to be the main focus of investors’ attention
After lower sales and earnings guidance from US retailers Macy's and Kohl's, and UK retailers Debenhams, John Lewis and M&S, question marks over the health of the traditional bricks and mortar retailers in both regions have been raised. The release of December’s retail sales for both the UK and US this week will show the extent to which the weakness is a company specific issue or a sign of a broader slowdown in consumer spending.
The uncertainty over Brexit in the UK and rising interest rates in the US has caused a slowdown in each region’s respective housing markets. This week sees the release of the RICS Housing survey in the UK and the NAHB housing survey in the US. These forward looking indicators will provide a good indication as to whether the slowdown is likely to persist or if a rebound in data can be expected.
MPs will finally get their chance to vote on Theresa May’s Withdrawal Agreement on Tuesday, the "Meaningful Vote" that was originally scheduled for December.
In a further sign of Mrs May’s loss of power and Parliament increasingly asserting their authority over the Brexit process, her government lost two important votes in the House of Commons last week. The first limiting the government's ability to change tax legislation in the event of a no-deal Brexit, and the more important second, that requires her to come up with a Plan B within three days if her deal is defeated.
With the outcome of Tuesday's vote seemingly a foregone conclusion; it's still unclear what happens next. Mrs May could head to Brussels to seek further concessions, but this strategy has so far proved unsuccessful.
Nevertheless with no parliamentary majority for any alternative deal, a no-deal Brexit or an extension of the Article 50 exit process – meaning the UK won’t be leaving EU on the 29th March - appear the most likely outcomes at the moment.
Central banks and US-China trade talks were the key themes driving markets last week.
In regards to central banks, the message from the Fed is that “patience”, in respect to future interest rate rises, is the operative word. The minutes of the Fed’s December FOMC meeting showed that in an environment of muted inflationary pressures and rising worries over global growth, the Fed can afford to take their time before raising interest rates again. The minutes echoed the views from numerous Fed policymakers last week, including Fed Chair, Jerome Powell. Last week appeared to mark a clear shift in the Fed’s thinking, with policymakers firmly in “wait-and-see” mode for a while.
US-China trade talks started on an optimistic note, although the outcome of the negotiations remains highly uncertain. Progress was reported on agriculture and energy, with China pledging to purchase substantial amounts of these goods as part of any trade deal. However, little details were provided on the more difficult issues to be resolved such as intellectual property rights. These are set to be discussed when senior officials from both sides meet in Washington later this month, with further talks pencilled in for the 30-31st January.
With regards to economic data, it was another disappointing week for the Eurozone. Germany reported steeper than expected declines in industrial and export figures, raising the risk of the economy falling into recession later this year. France industrial production numbers also disappointed. The one bright spot for the Eurozone was the unemployment figures, with the unemployment rate falling below 8% in November, the first time this has happened in a decade.
In the UK, the monthly GDP estimate showed the economy grew at a slightly stronger than expected rate in November (0.2% vs 0.1% mom forecast). The details showed that the stronger numbers were driven entirely by the strength of the service sector, with manufacturing activity contracting for a fifth month in a row.
Jaguar Land Rover, the UK’s largest carmaker announced that it will cut 4,500 jobs with the majority coming from its 40,000 UK workforce. The company blamed falling demand for diesel cars and a slowdown in Chinese sales for the job losses. The announcement followed similar warnings from Ford, who confirmed plans to cut thousands of jobs across Europe as part of its $14bn global cost-saving plan.
It was another week of disappointing results for the tech sector, with South Korean giant Samsung becoming the latest to forecast a decline in profits. The company expects fourth quarter operating profits to fall by over 25%, which would be the first quarterly drop in profits in over two years. Samsung blamed weaker than expected profits on slowing demand for memory chips and rising competition in the smartphone market, with the announcement echoing that of rival Apple made earlier this year.
Source: Bloomberg. Figures are for the period 7th January to 11th January 2019.
Where the index is in a foreign currency, we have provided the local currency return.
The above chart provides the performance for the three developed market geographies where the TMWM MPS portfolios maintain their largest exposure. All investments and indexes can go down as well as up. Past performance is not a reliable indicator of future performance.
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