Market in a Minute: Nov 4-8, 2019
by Rich and Sheila Jamison
Equities rallied after reported progress toward phase one of a US/China trade agreement. The three major indexes all set new all-time highs. Cyclical sectors set the pace.
Treasuries sold off, steepening the yield curve appreciably. The US 10-year Treasury yield jumped a whopping 20 basis points to 1.93%.
WTI crude oil rose about a buck (+1.8%) to $57.21/barrel.
Volatility (per CBOE’s VIX) slid still lower, to 12.1, down 0.2 for the week.
Progress toward signing phase one of a US/China trade agreement was reported. In essence, this meant discussion about removing some tariffs was ongoing. Actual status was clear. More or less in order of announcement,
Wilbur Ross (Commerce Secretary) said, "good progress” was being made in "Phase One" negotiations.
Chinese officials said that some existing tariffs might be rolled back by each side as part of the agreement.
China's Commerce Ministry announced that it reached an agreement with the US for both sides to phase out tariffs.
Trump said he had not – as of yet – agreed to roll back existing tariffs.
Trade and Manufacturing Director for White House Policy, Peter Navarro, confirmed that there were at least considerations being made to delay the December 15 tariffs.
While clarity has yet to emerge, there is talk that an agreement could be signed by Presidents Trump and Xi Jinping on the sidelines of a NATO summit in London in early December.
The key takeaway: the market continued to think some sort of deal will be signed in the absence of material developments suggesting otherwise. This optimistic view continued to foster a risk-on mindset in the stock market and a bearish sentiment in the Treasury market. With money market fund assets at $3.4 trillion, up $1 trillion over the past three years, a significant amount of cash is now sitting on the sidelines. That represents money that could (eventually) make its way into risk asset markets.
Also on the trade front, there were growing signs that we will refrain from – or delay – tariffs on European automobiles. A decision on whether European auto imports pose a US national security threat is due by November 14.
Recession fears are fading. In addition to optimism over a potential trade deal, signs that the global economy may avoid recession helped underpin risk assets while undermining safe havens. Major US equity indices reached record levels while developed-market government bond yields rose sharply and the US Treasury yield curve steepened further. At the same time, safe havens such as the Japanese yen and gold fell.
Several signs emerged that the global slowdown investors have contended with for much of the last year is starting to abate, building on the recent strong US employment report. At home, there was a rebound in the ISM non-manufacturing purchasing managers' index to 54.7 in October from 52.6 in September. (See Globally for Europe’s comeback signs.)
Nearly 90% of S&P 500 companies have reported their Q3 results. Blended EPS (earnings per share) shows earnings growth running at a -2.4% y-o-y (year-over-year) pace. Revenues are up a bit over 3% y-o-y. Recall that analysts had anticipated a 4% EPS decline at the start of the reporting period.
In Europe, tentative signs of stabilization were seen in the manufacturing PMI, which edged up to 45.9 from 45.7. The services sector rebounded more strongly, to 52.2 from 51.6. In addition, German factory orders rose for the first time in three months while Eurozone September retail sales rose 3.1% year over year.
The Bank of England held rates steady, but two members of its Monetary Policy Committee unexpectedly voted for a 25-basis-point cut in the bank's base lending rate. They cited downside risks to the committee's projections. Growth has slowed materially, the MPC said, amid negative business investment and moderating consumer spending. The Bank said it assumes the investment will turn positive in 2020 once uncertainty over Brexit has decreased. If that doesn't happen, rates may need to be lowered, it said.
Household spending in Japan rose 9.5% in September, ahead of a hike in the country's general sales tax to 10% from 8% in October. That's the largest monthly gain since 2001. While a pretax hike bump in consumption was expected, its magnitude exceeded expectations.
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