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Market round-up: 31 – 4 January 2019

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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.

Nursing something of a New Year’s hangover in a truncated trading week, 2019 saw little respite from the heavy selling that had characterised the previous year.

With the bongs of Big Ben now a distant memory, investors woke up to a slew of negative economic data, focusing on both China and the Eurozone. Numbers released on Wednesday showed that Chinese factory activity contracted for the first time in more than two years, whilst the equivalent data in Europe reached the lowest level since February 2016. The Eurostoxx benchmark opened as much as 1.7% down, although recouped most of its losses to end only 0.18% in the red. Bonds were the order of the day as investors moved into safe haven assets, with 10-year US treasury yields reaching 11-month lows.

The Christmas tradition of giving oranges as gifts is as old as Old Saint Nick himself. Although slightly outdated by today’s standards, the fruit was much more of a treat back then when citrus fruits were less abundant in the west. Over recent years, the fruit of choice has unequivocally been Apple, at least the company anyway, by becoming the largest company by market capitalisation in the world within 10 years of launching its first iPhone in 2007. The days of being a Wall Street darling, however, may well be behind the company as its first profit warning in 12 years pulled its value down to $700 billion, well below the $1.1 trillion it was valued at as little as three months ago.

Blaming weak Chinese demand for a Q4 revenue shortfall, analysts took a dim view, cutting their price targets and dumping the stock. Shares in the tech behemoth fell more than 10% on Thursday, dragging down the broader sector as associated chip and component makers also tumbled. Economic deceleration in China seems to have caught Apple off guard with trade tensions between Washington and Beijing starting to hurt retail sales in the world’s second largest economy.

There was some respite for investors on Friday however, as markets steadied on reports that the US and China would resume trade talks next week in an attempt to end a burgeoning trade war that had blighted investor sentiment for the majority of last year.

Friday morning also saw the US two-year treasury yield dip below base rates for the first time since 2008, falling to 2.4% as investors readjusted their expectations of future Fed rate policy. In a contrast from last year, futures markets are now pricing in a 40% chance that the US Federal Reserve will actually be forced to start cutting rates this year and is fully priced in by at least May 2020.  However, by Friday afternoon safe-haven US bonds had begun to sell off as very strong employment data from the US spurred risk assets. Against an expected 176,000 jobs being created, Non-farm payrolls grew by a massive 312,000 in December, while wages increased by 3.2% from a year ago.

 

The first full business week of 2019 could be a story of two central banks, perhaps setting the tone for market movements for the next few months.

With pronounced swings in investor sentiment during the festive period, many commentators have now switched from worrying about rates rising too quickly to actually pricing in a cut by the end of the year. Ten-year US Treasury yields have reacted accordingly, falling well below the perceived symbolic 3% level, with many expecting them to fall further if the US Federal Reserve starts to strike a more dovish tone.

Such speculation could be put paid to this week as a host of US central bankers address the media on Thursday. The Chair of the Fed, Jerome Powell, is due to take the floor first, speaking at the Economics Club lunch in Washington. During such speeches, volatility in both stock and currency markets can increase dramatically. As head of the central bank, which controls short-term interest rates, he has more influence over the nation’s currency value than any other person. Investors will scrutinise his words for clues to future rate policy.

It really is a tale of two central banks during the coming week, as our own head of the Bank of England, Mark Carney, is also due to give an address, this time on Wednesday. Much like his opposite number in the US, Carney’s words should also have a profound effect on domestic currency movements. Taking part in an online Q&A session at the Bank of England’s Future forum, Carney is not expected to say anything out of the ordinary this time, although he has been known to give his negative views on Brexit negotiations on more than one occasion.

On the economic data front, the end of the week will see US inflation figures as well as UK GDP statistics released. Perhaps the broadest measurement of economic activity, GDP measures the total change in the value of all goods and services produced in the UK. With the Brexit deadline just a few months away, this month’s GDP reading should take on added significance as we see what shape the economy is in.

 

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