U.S. EQUITIES
U.S. equity markets were higher last week, driving the S&P 500 to a new all-time high as better than expected corporate earnings offset a potential glitch in the US/China trade negotiations.
a) Dow Jones +1.37%, MTD +2.50%, YTD +21.15 b) S&P 500 +0.93%, MTD +1.91%, YTD +25.52% c) Russell 2000 +0.63%, MTD +2.37%, YTD +19.96%
Drivers:
I) China’s foreign ministry last Tuesday posted positive remarks about the trade talks, stating Presidents Trump and XI were in contact and progress was being made on the negotiations. The Financial Times reported that Trump administration officials were considering cutting tariffs 15% on about $111 billion in Chinese imports imposed on September 1. President Trump later stated he has yet to approve such a measure.
II) The ISM’s non-manufacturing report posted a better-than-expected acceleration in composite activity, at a headline 54.7 for October which was above the Street’s consensus range. Business activity (output) and employment contributed to the gain as did the two-point rise in new orders to 55.6. This gain did not reflect strength in exports which were flat, but there was strength in domestic demand. Despite the rise in new orders, backlogs fell into contraction.
III) U.S. Consumer credit came in far below expectations in September, up $9.5 billion. Revolving credit, reflecting credit card debt, fell $1.1 billion after falling a larger revised $2.2 billion previously, while non-revolving credit, where student loans and vehicle financing are tracked, rose $9.5 billion following August’s $20.0 billion increase. Revolving credit growth contracted at an annualized rate of 1.2% after falling 2.5% in August.
IV) Consumer sentiment was solid and steady, at 95.7 for the preliminary November reading and very near October’s 95.5 and the monthly average since November last year of 95.9. Inflation expectations remain low, unchanged at 2.5% for the year-ahead outlook though up 0.1% to 2.4% for the 5-year outlook. Employment and the stock market are main factors affecting confidence and the news on both this year has been solid.
V) Equities in November are higher with Small-Cap, Value, Energy and Financials leading equity price performance. The laggards for the month are Mid-Cap, Growth, REITs and Utilities.
Capitalization: Large Caps +1.92% (YTD +25.45%), Mid-Caps +1.60% (YTD +25.18%) and Small Caps +2.37% (YTD +19.96). Style: Value +2.98% (YTD +22.10%) and Growth +1.63% (YTD +19.59%). Industry Groups: Technology +2.99% (YTD +40.33%), Information Technology +3.01% (YTD 40.23%), Industrials +4.16% (YTD +28.85%), Financials +4.03% (YTD +27.23%), REITs -3.89% (YTD +24.36%), Consumer Discretionary +0.42% (YTD +23.86%), Communication Services +1.50% (YTD +22.99%), Consumer Staples -0.58% (YTD +22.00%), Materials +3.47% (YTD +20.93%), Utilities -3.81% (YTD +19.45%), Healthcare +0.47% (YTD +11.43) and Energy +4.84% (YTD +8.67%).
EUROPEAN EQUITIES
The MSCI Europe index rose last week by +0.17%, hitting its highest level since 2015 but pulled back on Friday as prospects for a US/China trade deal over the short term cooled a bit.
Drivers:
I) The Eurozone Flash Services PMI was revised from 51.8 to a final 52.2, a 0.6-point improvement on September’s final 51.6 but still one of the worst reports since 2014. In addition, the outlook did not seem better as new orders posted just a marginal gain and backlogs saw a third successive decline. Against this backdrop, expectations for future output fell to a level only slightly above August’s near-5-five-year bottom.
II) Eurozone Retailers had a subdued September. Sales were up just 0.1% on the month, underperforming already weak market expectations but still marking their first back-to-back gain since March/April. September’s minimal monthly gain reflected a 0.1% advance in ex-auto fuel, non-food purchases after a 0.7% increase last time. Within this, pharmaceutical and medical goods (0.6%) and mail order and internet (0.2%) stood out.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.17% for the week (MTD +0.99%, YTD +18.53%).
ASIAN EQUITIES
Asian equity markets were higher as Chinese officials announced Thursday that a mutual rollback of tariffs had been agreed upon as part of a “phase one” trade deal, but while one U.S. official confirmed that, two others disputed it. The Dow Jones Asia Index rose by +2.19% for the week, (MTD +2.73%, YTD +7.43%).
Drivers:
I) China’s trade surplus in US dollar terms widened from U.S. $39.65 billion in September to U.S. $42.81 billion in October. Exports fell 0.9% on the year in October after falling 3.2% in September, while imports fell 6.4% on the year, after falling 8.5% previously. Exports to the U.S. fell 16.2% on the year in October after dropping 21.9% in September, while exports to the EU grew 3.0%, up from growth of just 0.1% previously. Growth in China’s exports to Japan weakened in October.
II) China’s Consumer Price Index has been driven higher in 2019 due to disruptions in the country’s pork supply. The year-on-year consensus forecast for October consumer prices was 2.8%, down from September’s higher-than-expected 3.0%. The actual result was a rise of 3.8% on a year over year basis, while on the month, the rise was 0.9%.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by +2.37% (MTD +2.04%, YTD +19.17%), the Hang Seng Index rose by +2.20% (MTD +2.93%, YTD +7.08%) and the Shanghai Composite advanced by +0.20% (MTD +1.20%, YTD +18.86%).
FIXED INCOME
Treasury yields saw their biggest jump in over a month after signs of progress being made toward a U.S./China trade deal pushed long term government bonds rates to multi-month highs.
Performance: I) The 10-year Treasury yield was higher last week ending at 1.942% up from 1.716%. The 30-year yield advanced last week finishing at 2.430 jumping higher from 2.190%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index was lower -0.87% last week, MTD -1.02% and YTD +7.74%. The Bloomberg Barclays US MBS TR declined by -0.24% last week, MTD -0.26% and YTD +5.70%. The Bloomberg Barclay’s US Corporate HY Index was higher by +0.07%, MTD +0.19% and YTD +11.92%.
COMMODITIES
The DJ Commodity Index was weak last week dropping by -0.09% but is positive month to date +1.46% (YTD +8.25%). Commodity prices were slightly lower as precious metals declined on a stronger USD and the flow of capital into risk assets.
Performance: I) The price of oil rose last week by +2.25% up to $57.45 and has risen month to date in October by +6.03% (YTD +26.51%). Oil prices surged to a six-week high, as investor pondered over expectations for energy demand versus conflicting news tied to the US/China trade negotiations.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +1.31 ending at 98.40 for the week (MTD +1.07%, YTD +2.32%). The USD rallied last week as the US Treasury cur steepened, engendering hope for a re-acceleration for US economic growth.
III) Gold plunged last week, posting its largest weekly decline since May 2017, as investors flocked to risk assets on word that progress was being made toward a Phase one deal in the U.S./China trade negotiations. Gold was lower by -3.76% last week, falling to $1459.8 (MTD -3.63%, YTD +13.93%).
HEDGE FUNDS
Hedge fund returns in November are mostly higher for the month with core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy all in positive territory.
Performance:
- I) The HFRX Global Hedge Fund Index is higher at +0.29% MTD and up +6.54% YTD.
- II) Equity Hedge has risen by +0.43% MTD and is up +8.89% YTD.
- III) Event Driven is higher MTD +0.45% and is higher YTD +6.06%.
- IV) Macro/CTA has risen by +0.19% MTD and is up +3.78% YTD.
- V) Relative Value Arbitrage has advanced by +0.07% and is up +5.25% YTD.
- VI) Multi-Strategy is up MTD at +0.03% and is higher by +4.92% YTD.
ECONOMIC DATA WATCH AND MARKET OUTLOOK
The U.S. equity markets continued their upward trend last week, as the S&P 500 hit a new all-time high at 3093.08.
I have been following global markets for decades and it never ceases to amaze me how investor sentiment can drive markets both up and down. In 2018, even though S&P 500 earnings growth for the year exceeded 20.0%, the index closed lower by 4.38%. Investor sentiment was negative due to the escalating U.S./China tariff war, concerns slowing trade would stunt global economic growth, and the U.S. government was shut over a budget dispute. Amid the Q3 2019 earnings season, with approximately 89% (444 companies) of the S&P 500 having reported, market pundits are estimating a quarterly decline in earnings of -1.0%. The earnings decline has not deterred the U.S. equity markets to reach new highs, as investors have a positive outlook for the “reflation trade” as an eventual U.S./China trade deal should hopefully reignite global trade, corporate capital expenditures and global growth.
As we enter next week’s trading sessions, investors will be looking for further progress in the U.S./China trade negotiations. Despite the rhetoric from both sides, the recent trade data shows that China and the U.S. could both benefit from a trade agreement. U.S. imports from China have decline by 4.9%, while China imports into the U.S. have dropped by 10.0%. In order to get the U.S. and China to agree to a Phase One agreement, concessions will need to be made for any possibility of a deal signing in December. China is insisting on a lifting of tariffs on $110 billion worth of goods that were levied in September. The U.S. is pressing China to agree to a strict monitoring of intellectual property thief. Global markets have been a bit complacent, and though the price trend is still positive, any hiccup in the U.S./China trade talks will provoke some volatility. Can the complacent global equity markets co-exist with the on-going anxiety over trade?
In turning to next week’s economic calendar, U.S. inflation data and the report on U.S Retail sales will be grabbing the headlines. On Wednesday, we get a read on consumer prices which cooled in September, though the core year on year rate rose due to increases in medical care and housing costs. The CPI is expected to remain unchanged while the monthly core reading is expected at 0.2% versus 0.1% last month. The year on year rate is projected at 1.7%.
Producer prices were very weak in September, declining 0.3% and ex food and energy came in at the same level. The consensus estimate for October is a 0.3% increase with ex-food and energy seen at 0.2%. Year-on-year rates are seen at an increase of 0.9% overall and plus 1.6% ex-food and ex-energy.
The all-important U.S. Retail Sales report out of Friday, was essentially flat in September but maintained the year’s upward trend. A modest growth is the call for October where the consensus outlook is for a 0.2% increase. Unit vehicle sales slowed sharply in October which may give a relative boost to ex-auto sales which are expected to rise a respectable 0.4%. Ex-autos and less gasoline are expected at a 0.3% gain.
Data Source: Haver Economics
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