Market Overview:
Hopes for a solution to the US government shutdown and progress in the US-China trade negotiations helped US equities power to the highest levels since mid-December at the close of the week on Friday.
Generally, Financial Markets ended last week on a more upbeat note as reports suggested that the US was looking to lift some tariffs on Chinese goods to create some goodwill with China in order for bigger concessions in the trade talks. It was also reported that China was looking to cut-back its trade surplus with the US by increasing US imports by around US$1 trillion. However come Monday the news was more sobering, that the two sides are making little progress on the key issue of intellectual property protection.
Trading was subdued to start the week owing to the US Martin Luther King holiday on Monday.
Other data yesterday confirmed China’s economy expanded at the slowest pace since the global financial crisis, in line with many expectations, though December figures for industrial production and retail sales were buoyant. Reinforcing the more downbeat market mood was news that the IMF was cutting its global growth forecast to the weakest in three years — in part because of softening demand in Europe.
The World Economic Forum kicks off in Davos, Switzerland tonight so expect some headlines from this event over the next few days, however with no US attendance (President Trump and his senior advisors are staying away due to the shutdown), and both French and UK leaders also absent due to problems at home, we expect most of the headlines will lack the usual punch.
Brexit developments were high on the agenda overnight. Following the profound defeat in last week’s “meaningful vote”, UK Prime Minister Theresa May delivered to the House of Commons her amended vision for a way forward for Brexit which looked pretty similar to the old vision…. little of substance again could be gleaned from the UK House of Commons,with the spectacle displaying the same partisanship, gridlock and frustration exhibited last week.
There are rate decisions for the Bank of Japan (Wednesday), and the European Central Bank (Thursday).
Australia
The Australian dollar remains under pressure as the China/US trade dispute rumbles on…China remains Australia’s largest trading partner with over 30% of Australian exports going into the second world’s largest economy, with the Aussie now directly correlated with Chinese growth. Trade tensions have fuelled the economic slowdown of the Asian giant, which, in figures released yesterday showed third quarter 2018 grew just by 6.5%, the weakest year-on-year quarterly GDP growth since the first quarter of 2009. In the three months to September, the Australian economy grew by 0.6%, the weakest pace of expansion in two years. Also adding to the negative AUD sentiment is the continued deteriorating domestic housing market, a result of tightening lending conditions and weakening demand.
However, the Australian equity market had a more positive outcome, with Australian shares higher for the fifth straight day, on optimism of a resolution to trade tensions between the US and China offsetting the more bearish Chinese trade data.
There looks to be little room for any sustained AUD recovery over the next few months…. more likely, the currency will continue to suffer from fears of what’s to come on the trade front and ongoing soft growth figures. Thursday’s employment figures will be crucial in providing further AUD clarity.
New Zealand
The New Zealand dollar drifted lower overnight in light trading due to the US holiday and traders reluctant to take big positions ahead of tomorrow’s CPI data.
Overnight positive news from PM Ardern’s meeting with UK PM May, where it has been reported that New Zealand will be one of the first cabs off the rank for a post Brexit trade deal with the UK.
The downbeat Chinese GDP data also added to the cooling effect on the NZD , but the next significant catalyst for the pair will be Wednesday’s inflation report , which is expected to show no change in the CPI on a quarterly basis in Q4 2018…any negative data would further weigh on the NZD with markets increasing factoring in a more dovish RBNZ ….we do not envisage any change in RBNZ outlook with an “on-hold” rate stance remaining out until Q4 this year as the most likely scenario.
United States
The weekend’s US economic data releases delivered mixed results with industrial production for the month of December printing slightly better than expected, with increases in manufacturing and mining output more than offsetting a pullback in utilities output, while consumer sentiment in January fell to its lowest level since October 2016.
Political machinations aside, the US economic growth story continues to remain on track albeit on a more cautious note, as the risks from a non-resolution of the US/China trade dispute continue to cast a shadow over both equity markets and the USD. Thrown into the mix is the ongoing government shutdown, now the longest in US history which is starting to impact the economy and has the potential to impinge on further growth.
Calls are now growing louder for President Trump to settle the trade war and government shutdown, as fresh evidence pours in that businesses and consumers are beginning to lose faith in the global expansion.
There are more US corporate results this week with heavyweights, Johnson & Johnson, IBM, UBS, United Technologies, Texas Instruments, and Ford among companies posting results this week. Equity Investors are now caught between a stellar start to the year, solid corporate results and increasingly hazy prospects for global growth and trade look for softer US equity markets over the week….US dollar should hold around current levels mainly due to more negative outlooks for Europe and Asian currencies on slowing economic data.
Europe
The main news out of the Eurozone this week is the ECB rate decision Thursday….little change is expected especially given the softening of German economic data is pointing to a the potential of a more general weakness across the Eurozone….It also appears that the ramifications of the UK exit from that of the Eurozone economy are gradually starting to sink in as several large German companies last week made their concerns public of a no-deal Brexit.
Recent comments from ECB members, notably including Draghi, highlighted lower growth than expected and the lack of inflation pressures in the region with core CPI stuck at 1.0%. Their conclusion remains that ECB stimulus needs to be sustained and so look for their extended forward guidance to be underscored at rate announcement on Thursday.
Given continued Eurozone data weakness any EUR strength looks unlikely over this week.
United Kingdom
Overnight UK PM May came back to Parliament with Plan B of the Brexit mess…. She rejected calls to delay the UK’s departure from the European Union and said her Plan B was to have Parliament approve the Brexit agreement after securing changes to the contentious Irish border measure. May said she had “heeded lawmakers’ concerns over the Irish backstop,” and said she will be “talking further this week to colleagues … to consider how we might meet our obligations to the people of Northern Ireland and Ireland in a way that can command the greatest possible support in the House.” Parliamentarians are due to vote on May’s Plan B and any possible amendments on the 29th January, but there remains little clarity form the House of Commons with the spectacle displaying the same partisanship, gridlock and frustration that was on show last week…..look for continued volatility in the GBP and UK equities as fundamentals take a backseat to the continuing Brexit shambles as the March 29th end date looms ever closer.
Japan
Japanese data continues to remain soft, with the chances of Japan slipping into a recession in the fiscal year April 2019-March 2020 rising over the last three months, according to a recent poll of 39 economists. However, with forecasts of growth around 0.8% for the new year starting in April, Japan will probably manage to avoid a recession although the outlook is shaky.
Confidence among Japanese manufacturers dipped for a third straight month in January to a two-year low amid global growth concerns and looming trade tensions. The sentiment index for manufacturers stood at 18, down five points from the previous month, dragged down by declines in sectors such as steel and automobiles, according to the survey …However underpinned by retailers, the service-sector index held steady at 31 in January reflecting firmness in private consumption, which accounts for about 60% of the economy.
Tomorrow afternoon there is the BoJ interest rate decision followed by a press conference, no change in policy is expected but look for subdued JPY trading as the BoJ monetary is still viewed as a risk event.
Canada
Latest Canadian CPI data for December showed an unexpected jump to 2.0% y/y (consensus: 1.7%), despite a notable drag from energy prices.
This upside surprise was mainly due to one-off factors (especially airfares) and exchange rate pass through, which is unlikely to persist into 2019. By contrast, the BoC’s core inflation measures were marginally softer on balance (averaging 1.87% y/y) following revisions to the November figures.
The CAD lifted marginally after this release but with average core inflation measures remaining unchanged, the BoC is still sitting on the side-lines awaiting more consistent data improvements before re-igniting the rate hike debate.
The USD/CAD continues to trade in a sideways pattern with 1.3350 remaining a crucial topside resistance level.
Major Announcements last week:
- US Bank Holiday Monday
- Brexit Parliament vote rejected
- 29th Jan is the next crutial Brexit parliamentary vote
- UK Retail Sales down -0.9% from 0.8% expected
- Canadian monthly CPI prints -0.1% from market expectations of -0.4% boostng the CAD
- Ardern speaks with Theresa May to cement a possible post Brexit trade deal for NZ