The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in January 2019.
With 2018 having seen the poorest stock market returns since the Global Financial Crisis, the beginning of 2019 has shown something of contrast thus far. As any geologist or etymologist will tell you, the signs for January harbouring negative returns are already signalled in its birthstone, the garnet. The word itself comes from the 14th century middle-English word gernet, ominously meaning ‘dark red’, which could foreshadow a rocky period for markets.
Following one of the worst Decembers on record, global bourses rebounded strongly during the first full week of the year, predominantly fuelled by rising optimism about the outcome of trade talks between Washington and Beijing. Having been a constant thorn in the side of investors for the majority of 2018, it seems tensions between the two global superpowers could be beginning to thaw as US officials met their Chinese counterparts for the first face-to-face talks since a 90-day truce was announced in December. Comments from US Commerce Secretary, Wilbur Ross, helped to buoy expectations when he commented on Monday that the two countries could reach a trade deal that “we can live with”.
After last Friday’s hefty gains, in which the S&P500 rose over 3%, the first four days of this week saw straight consecutive gains, its longest winning streak since August. Unlike previous trade summits in which little was achieved, there seems to be some concrete signs of progress this time as China agreed to buy a “substantial amount” of US agricultural machinery and manufactured goods on Wednesday.
Adding to the risk on mood were accommodative words from the US Federal Reserve who said they could be patient about future interest rate rises so the bank could assess growing risks to the otherwise solid US economic outlook. Growing bets that the Fed will halt its multi-year rate hike cycle sent the US dollar lower across the board, aiding both emerging markets and commodities. US Treasury yields were also on the rise, hampered by improved risk appetite.
Oil was the other big winner of the week, not only spurred on by hopes of easing trade tensions, but also reports that OPEC would introduce production cuts. On Wednesday alone, Brent jumped 4.8% rising to $61.44 a barrel.
On the economic data front, domestic GDP was released on Friday morning, coming in stronger than many economists’ forecasts. Showing growth of 0.2% vs consensus forecasts of 0.1%, the value of goods and services the country produces did climb marginally. In currency markets, there was some relief for sterling, rising against major currencies on reports that it is looking increasingly likely that Brexit could be delayed beyond the 29 March deadline.
After a strong start to the year for equity markets, investors will be hoping for momentum to continue in the coming week.
It’s a busy start with data released from the world’s second largest economy, China, on Monday morning. Trade figures will give an indication of the health of the largest trading nation. Recent export data has slowed, as the effects of front-loading orders to beat trade tariffs has begun to fade. Import data has also been weak of late, with last month’s reading the lowest since October 2016 – investors will be hoping for a rebound this month. On the continent, Eurozone industrial production figures are also released. The data measures the volume change of output of the manufacturing and energy sector. It is of key significance as the industrial sector contributes a quarter of the Eurozone’s Gross Domestic Product (GDP).
Inflation figures from the UK and Eurozone, published on Wednesday, could potentially undershoot, as the effects of a falling oil price begin to feed into numbers. The oil price dropped a staggering 35% in the final quarter of 2018, which should act as an effective tax cut to the consumer. Contained inflation is important as it will relieve pressure on central banks to raise interest rates, while it will also mean workers are experiencing real wage growth, which in turn should lead to higher consumption.
Despite a volatile period in equity markets recently, the US market has continued to create jobs, with workers also experiencing real wage growth. With the consumer at the heart of the economy, US Retail Sales data should provide a deeper insight into the consumer’s spending patterns and in turn help determine the overall health of the United States.
As the week progresses, we will receive more key data from the US including housing data and industrial and manufacturing figures. Certain economists have pointed to a softening of the housing market in H2 2018 as a cause for concern, with higher interest rates feeding into the affordability of homes. However, more recently we have witnessed US mortgage rates fall, reaching the lowest level in nine months, and this has been a boost to prospective purchasers.