CMC Markets | Jan 11, 2019 15:41
Despite a lacklustre end to the week, 2019 has managed to get off to a decent start despite equity markets finishing 2018 very much on the back foot. The first full trading week of the new year has been in marked contrast to how investors were reacting in the aftermath of the Fed’s decision to raise rates, and Fed chair Jay Powell’s rather hawkish press conference thereafter.
Since that meeting sentiment has shifted quite significantly to one of cautious optimism, after five days of gains for US markets in the wake of a bumper US payrolls report last Friday, and a rowing back on the part of the US Federal Reserve, and Chairman Powell, in particular on the hawkish rhetoric that had been a hallmark of 2018.
His backtracking this week on balance sheet reduction being on auto pilot appears to have gone some way to persuading investors that the Fed has belatedly recognised that its current tightening strategy is posing significant risks to the global economy, and as a result we’ve seen a raft of FOMC members also come out, channelling Take That and making the case that now is the time for patience when it comes to future rate rises.
This would suggest we probably won’t see another rate rise in the first half of this year, if we see one at all this year.
China’s decision last week to cut bank reserve requirements has also helped, along with a much more collegiate atmosphere with respect to US, China trade relations and has added to the feeling that the we may well have found a short term base. This has been reinforced by the fact that we’ve seen some extremely disappointing economic data from the likes of Germany, France, Italy and the UK shrugged off, with the FTSE100 briefly hitting a one month high earlier today, before falling back from its highs on the day.
Of course next week could be an altogether different ball game, but for now the FTSE100 has managed to post three successive weekly gains, though the rest of Europe has lagged behind somewhat.
Having postponed a parliamentary vote on her controversial Brexit deal last month, Prime Minister Theresa May is expected to try and force MPs to vote through her deal, probably on Tuesday. It is unlikely to gain the support of the majority of MPs in the first instance, which means that the prospect of a no deal Brexit is likely to re-emerge as a significant risk in the weeks ahead.
Recent events have done little to assuage concerns that the deadlock amongst MPs will mean that parliament is unable to agree on anything before the UK’s exit date which means we could well leave on 29th March without anything being agreed. The fiasco of the last few days where MPs have made the government’s life more difficult in terms of contingency planning for a no deal, and it remains far from clear as to what other alternatives there are to either a 'no deal' Brexit or the Prime Minister’s deal. From the outside world looking in it would appear that UK democracy is eating itself.
Earlier this month the People’s Bank of China eased reserve requirement ratios in an attempt to stimulate lending to the real economy after recent data showed that the Chinese economy slowed in the last quarter. The most recent November trade numbers showed a sharp decline in exports as the trade war between the US and China showed signs of biting. Manufacturing has also looked weak, though more encouragingly services has been stronger. Nonetheless the recent November numbers for retail sales growth and industrial production were disappointing.
If this week’s December numbers reaffirm the slowdown then we could well see speculation about further stimulus measures from Chinese authorities on top of this month’s already announced measures, given that inflationary pressures have declined considerably in the past few weeks.
In November UK headline inflation fell to its lowest level since early 2017 at 2.3%. This was welcome news and was largely as a result of the fall in oil prices seen since those peaks in October. This is likely to continue to be reflected in the December numbers along with heavy discounting heading into the Christmas period. With wages growing at their best levels in a decade the outlook for UK consumers could well improve as we head into 2019.
Last month the ECB announced the end of its long running asset purchase program, with little in the way of evidence that it has had the desired effect of boosting the outlook for inflation and economic growth. At the most recent preliminary inflation numbers for December, headline CPI fell back to 1.6%, from 1.9% while core prices have remained steady at 1%. Against this type of deflationary backdrop it is hard to imagine a scenario where the ECB can credibly conceive of any sort of rate rise this year, or any year for that matter, particularly at a time when economic growth in Europe appears to be stalling.
These numbers may not be released due to the US government shutdown. US retail sales have shown a strong run of gains in 2018, in positive territory for 9 months in a row. With wages growth at ten year highs and US retailers likely to have offered discounts in the run up to Christmas we could well see another good month, with expectations of another solid month to round off what was a strong year for the US jobs markets and US wages growth.
The UK consumer has had a slightly more challenging year, as has the UK retail sector, nonetheless UK retail sales for 2018 were much higher than in 2017, and saw a strong monthly performance of 1.4% in November signalling a potentially strong end to Q4. A strong December number is likely to round off a solid end to what has been a tough year for UK retail stores, who have struggled with their margins, as a result of higher costs, and consumers who have become much more price sensitive.
With CPI trending sharply lower in the last few months it is hard to imagine that this trend will slow in December, given the sharp declines seen in the oil price since October. In November annualised inflation fell sharply to 1.7% from 2.4% and was likely behind the recent decision by the Bank of Canada to hold interest rates at their current levels, and not follow the Federal Reserve’s December decision to raise interest rates.
In their Q3 updates earnings and revenues all came in better than expected, helped by improvements in both retail and investment banking operations. That didn’t stop heavy falls in the share prices of all the major banks since those updates as investors fretted about the prospects for the US economy and an over aggressive Fed and a flattening yield curve.
Since the lows in December we have seen evidence of the beginnings of a rebound helped by a continued resilience in US economic data, as well as some decent moves in equity markets which are likely to have helped drive increased trading activity. This won’t help their bond trading operations, where yields have started to slide back, and the yield curve has continued to flatten.
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Written By: CMC Markets
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