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Weekly Update - 17 December 2018

MARKET MOVES (Week ending December 16, 2018)

  • Global equity markets marginally fell over the week. US-China trade negotiations saw some positive developments with China increasing purchases of agricultural products from the US and reducing tariffs to 15% from 40% on US-manufactured automobiles.
  • The S&P 500 index fell by 1.2%, marginally underperforming the MSCI World index which fell by 1.1%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (-0.9% vs. -5.4%).
  • US Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 index fell by 1.2% and the Russell 2000 index fell by 2.5%. On a year-to-date basis, the S&P 500 Index has outperformed the Russell 2000 Index (-0.9% vs.-7.0%). Growth stocks fell by 0.8% and Value stocks fell by 1.7% over the week as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (1.5% vs -3.7%).
  • The 10-year US treasury yield rose by 4bps to 2.89% whilst the 30-year US treasury yields remained unchanged at 3.14%. The 20-year TIPS yield rose by 9bps to 1.15% and the 20-year breakeven fell by 7bps to 1.88%.
  • The spreads on the Bloomberg Barclays Capital Long Credit Index fell by 6bps to 183bps and the Bank of America Merrill Lynch US Corporate Index fell by 3bps to 148bps. The US high yield bond spread over US treasury yields fell by 4bps to 446bps. The spread of USD denominated EM debt over US treasury yields fell by 10bps to 390bps over the week.
  • The S&P GSCI fell by 2.4% in USD terms over the week. The energy sector fell by 3.5% as the price of WTI Crude oil fell by 2.7% to US$51/BBL. Industrial metals fell by 1.0% as copper prices fell by 1.1% to US$6,104/MT. Agricultural prices fell by 0.6% and gold prices fell by 0.6% to US$1,235/Oz.  
  • The US dollar appreciated against major currencies over the week. The US dollar appreciated by 1.6% against sterling, ending the week at $1.26/£. The US dollar appreciated by 0.8% against the euro, finishing the week at $1.13/€. The US dollar appreciated by 0.6% against the Japanese yen, ending the week at ¥113.42/$. The US dollar appreciated by 0.6% against the Canadian dollar, ending the week at C$1.34/$. 
Economic Releases
  • US economic releases ended last week on a disappointing note as provisional Purchasing Managers' Index (PMI) data showed a deceleration in both the manufacturing and services sector. Both index readings missed forecasts of a 0.3-point dip to 55.0 and fell to 53.9 and 53.4, respectively – the former reaching a thirteen-month low. The poor PMI data was preceded by stronger-than-expected retail sales growth. Sales rose by 0.2% in November against consensus estimates of a 0.1% increase while October's release was upwardly revised to 1.1%. Earlier in the week, consumer prices were unchanged over November and resulted in a slight slowing in headline inflation on a year-on-year basis from 2.5% to 2.2%. Underlying inflationary pressures held firm, as reflected by the increase in core inflation (increase to 2.2% from 2.1%) but were offset by the sharp drop in energy prices.
  • In the Euro Area, the Markit Services PMI declined by two points from 53.4 to 51.4 – the lowest reading since November 2014 – as new business and expectations declined to four-year lows. Similarly, manufacturing PMI slipped from 51.8 to 51.4 expectations fell to a six-year low while goods orders declined at the fastest rate in four years. German PMIs fared slightly better but still fell by 0.3 points to 51.5 for the manufacturing sector and 0.8 points to 52.5 for the services sector. Elsewhere, Euro Area industrial production bounced back from a downwardly revised 0.6% decline in September, rising 0.2% in October. Finally, the December German ZEW survey of economic sentiment rose by 6.6 points to -17.5 as Brexit and trade tensions continued to weigh on exports and private investment. The ZEW current situation survey fell sharply by 12.9 points to 45.3, well below consensus of 55.8.
  • In Japan, the Bank of Japan’s Q4 2018 Tankan survey revealed resilient sentiment in both manufacturing and non-manufacturing sectors with both outperforming expectations of a 1-point fall. The Tankan large manufacturer’s index held firm 19 and above the consensus estimates of 18 while the non-manufacturing increased by 2-points to 24. More-positive sentiment was also reflected in the Nikkei manufacturing PMI release with December's reading showing a 0.2-point increase to 52.4. However, the outlook soured for both sectors with the manufacturing outlook falling to 15 from 19, and the non-manufacturing outlook falling to 20 from 22. After September's natural disaster affected 18.3% drop, core machine orders rebounded by 7.6% in October but missed analyst forecasts of 9.7% increase.
  • In China, industrial production growth unexpectedly slowed to 5.4% for the year to November. Analysts had expected November's reading to remain at 5.9%. Fixed asset investment grew by 5.9% (year-to-date) from a year earlier, marginally beating economist forecast of 5.8% growth. In addition, retail sales growth decelerated to 8.1% over the year to November, falling short of analyst forecasts of 8.8% growth.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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