A Scrooge-like shadow over the markets
A week that started with such optimism ended in disappointment as trade-war and US slowdown fears cast their shadow, Scrooge-like, over investors’ hopes for a year end “Santa rally”.
Fed Chair Jay Powell’s more dovish comments helped recover investor sentiment at the start of the week. But the sceptics remained convinced that the trade truce reached at last weekend’s G-20 summit was just a quick fix, which may lead to heightened strains between the countries further down the line.
Hopes for a truce were further undermined by the arrest of the CFO and founder’s daughter of Huawei at the US request, as she changed planes in Vancouver. The arrest, on Iran sanction busting charges, sparked a bitter diplomatic row, overshadowing what were already likely to be tough tariff discussions. The markets concerns, despite US claims the two can be separated, is that there will be little progress on trade until the Huawei incident is settled.
Markets globally became more volatile as the week progressed, with US shares selling off at Friday’s close to end the week down -4.6%, amid concerns of a US slowdown. Equity markets also moved lower across Europe as investors focused their attention on the flattening US yield curve. A meaningful inversion of the US yield curve (where longer-dated yields move below shorter-dated ones) have in the past preceded recessions, and last week saw spreads flirt with this fate. The spread between 2 and 10-year yields fell to 11bps - a concern, but not the inversion feared by investors.
US markets had steadied into Friday, supported by positive comments from John Williams, president of the New York Fed, who said that engineering a soft landing for the US is the Fed’s biggest task, before losing their nerve again into the close. A rate hike is widely expected at the Fed’s December meeting, but expectations for hikes next year have retreated rapidly in the wake of recent dovish Fed comments.
Beijing was quick to demand the release of the Huawei executive but, so far, President Xi has instructed his officials to follow through on the agreement made with the US at the G20. Still, markets may also be worrying about the long-term consequences of the arrest of Huawei’s CFO, which could be viewed as another move by the Trump regime to strengthen US defenses against China’s global military, technological and economic ambitions.
Source: FE Analytics, data sterling total return to 3 December
No festive respite for May
Mrs May faces another tough week at work as Brexit shows no signs of allowing her some well-deserved festive respite. Her cabinet colleagues lobbied her to delay tomorrow’s Commons vote, and the BBC reported Monday that she was “understood to be delaying the vote”. Once she does goes ahead with the vote, if she still loses, the next steps are fraught with unknowns. Government whips will have been working furiously over the weekend to bring any unruly Conservative MPs into line. The expensive possibility of a disorderly no deal cannot be ruled out and sterling fell as parliament turned the screws on the PM’s plans, though the European Court of Justice issued its ruling Monday that the whole thing could be called off without the revocation of Article 50 having to be approved by the EU’s 27 members.
Into the weekend Mrs May maintained silence on any ‘Plan B’ to cover a Commons rejection of her EU deal, but Work and Pensions Secretary and perceived ally Amber Rudd aired the possibility of a Norway-style alternative. A fractious week with potential for market turbulence was in prospect as Monday morning dawned.
UK 10-Year yield @ 1.24%
US 10-Year yield @ 2.86%
Germany 10-Year yield @ 0.26%
Italy 10-Year yield @ 3.10%
Spain 10-Year yield @ 1.45%
Economic data and companies reporting for week commencing 3 December
Monday 10 December
UK: October GDP
US: JOLTS employment data
Quarterly results: Photo-Me International plc
Tuesday 11 December
UK: November Labour market report
US: November NFIB survey
EU: German ZEW business survey
Quarterly results: Carpetright plc; Ashtead Group plc
Wednesday 12 December
US: November CPI
EU: Euro area October industrial production
Quarterly results: Dixons Carphone plc
Thursday 13 December
US: Weekly initial jobless claims
Quarterly results: Sports Direct International plc
Friday 14 December
US: November retail sales, industrial production; December flash PMI
EU: December flash PMIs