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Weekly Update - 30 December 2018

MARKET MOVES (Week ending December 30, 2018)

  • Global equity markets remained volatile over the fortnight with markets making large moves over the Christmas holidays period. During the period, the CBOE Volatility Index (VIX), which measures volatility in the US equity market, reached a six-month high of 36.2 as it remained above its long-term average of 20.
  • In a unanimous decision, the US Federal Reserve (Fed) raised its benchmark interest rates by another 25bps to a range of 2.25% - 2.50%. The US federal government was partially shut down over the fortnight as Congress failed to pass legislation to fund government operations amidst a dispute over a proposed border wall between the US and Mexico. 
  • The S&P 500 index fell by 4.3%, underperforming the MSCI World index which fell by 3.6%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (-5.2% vs. -8.9%).
  • US Large Cap stocks outperformed Small Cap stocks over the fortnight as the S&P 500 index fell by 4.3% and the Russell 2000 index fell by 5.1%. On a year-to-date basis, the S&P 500 Index has outperformed the Russell 2000 Index (-5.2% vs.-11.7%). Growth stocks fell by 4.4% and Value stocks fell by 4.3% over the fortnight as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (-2.9% vs -7.9%).
  • The 10-year US treasury yield fell by 15bps to 2.74% whilst the 30-year US treasury yields fell by 9bps to 3.05% in a fortnight in which the partial US government shutdown dominated headlines. The 20-year TIPS yield fell by 4bps to 1.11% and the 20-year breakeven fell by 10bps to 1.78%. 
  • The spreads on the Bloomberg Barclays Capital Long Credit Index rose by 15bps to 198bps and the Bank of America Merrill Lynch US Corporate Index rose by 10bps to 158bps. The US high yield bond spread over US treasury yields rose by 84bps to 530bps. The spread of USD denominated EM debt over US treasury yields rose by 20bps to 410bps over the fortnight.
  • The S&P GSCI fell by 7.6% in USD terms over the fortnight. The energy sector fell by 11.5% as the price of WTI Crude oil fell by 11.5% to US$45/BBL. Industrial metals fell by 2.4% as copper prices fell by 1.4% to US$6,018/MT. Agricultural prices fell by 3.0% and gold prices rose by 3.5% to US$1,279/Oz.  
  • The US dollar depreciated against most major currencies over the fortnight, with the exception of the Canadian dollar. The US dollar depreciated by 1.0% against sterling, ending the week at $1.27/£. The US dollar depreciated by 1.2% against the euro, finishing the week at $1.14/€. The US dollar depreciated by 2.7% against the Japanese yen, ending the week at ¥110.42/$. The US dollar appreciated by 1.9% against the Canadian dollar, ending the fortnight at C$1.36/$.  
Economic Releases
  • In their last meeting of 2018, the US Federal Open Market Committee (FOMC) decided to hike the Federal funds rate target by 0.25% to 2.25-2.50%. While FOMC officials have lowered their 2019 projection for the Fed funds rate with only two rate hikes, it remains ahead of current market pricing which implies no additional rate hikes. Third quarter real GDP growth was revised slightly lower to an annualized 3.4% from 3.5%. Although orders for durable goods did rebound 0.8% in November after dropping 4.3% in the previous month, the reading was only half of the forecasted growth rate. The Conference Board's Consumer Confidence Index underperformed expectations and slipped to 128.1 from an upwardly revised 136.4 – December's reading was estimated to fall 1.9 points to 133.5. 
  • In the Euro Area, consumer price inflation was revised lower to 1.9% in the year to November, below the preliminary estimates of 2.0% and October's reading of 2.2%. Consumer confidence fell by 2.3 points to -6.2 in December; the lowest reading since February 2017. In Germany, consumer price inflation slowed to 1.7% in the year to December, significantly below November's reading of 2.3%. Inflation reached an eight-month low in Germany as a slowdown in energy and food prices drove inflation lower. The IFO Business Climate Index for Germany missed estimates of a 0.3-point dip to 101.7 and fell by one point to 101.0 in December; the lowest reading in two years as trade tensions and Brexit concerns reduces business confidence.
  • Based on preliminary data, Japanese industrial production contracted by 1.1% in November; less than the expected 1.5% fall but significantly below October’s 2.9% increase. Retail sales fell by 1.0% in November from the upwardly revised 1.3% growth recorded in October. The jobless rate unexpectedly inched slightly higher to 2.5%, against forecasts of it remaining at 2.4% while the job-to-applicant ratio inched higher to 1.63 from 1.62 – both measures still reflect a very tight labour market. As expected, headline consumer price inflation slowed to 0.8% from 1.4% for the year to November. Core consumer price inflation, which excludes more volatile food but not energy prices, slowed to 0.9% against expectations of it remaining at 1.0%. Export growth slowed to 0.1% for the year to November, down from 8.2% growth recorded previously and below expectations of 1.2% growth. However, imports rose by 12.5% over the same period, surpassing forecasts of an 11.8% increase but well below the previous reading of a 20.0% increase. This resulted in the trade deficit widening to ¥737.3bn from ¥453.9bn in November and larger than analyst forecasts of a ¥630.0bn deficit. 
  • In China, the official Chinese manufacturing PMI slipped into contractionary territory for the first time in more than two years in December, as the index fell by 0.6 points to 49.4 against forecasts of it remaining at 50. However, the official non-manufacturing PMI rose to 53.8 from 53.4 over the month. Against a backdrop of heightened trade tensions and slowing economic momentum, industrial profit growth dropped for the first time in almost three years and slowed for a seventh consecutive month to -1.8% over the year to November, down from the previous reading of 3.6%. China's National Bureau of Statistics attributed the disappointing release to slowing growth in sales and producer prices alongside rising costs.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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