Market in a Minute: Sept 9-13, 2019
by Rich and Sheila Jamison
Equities rose for a third week and interest rates spiked sharply. Markets were boosted by easing US recession fears and hopes for progress in US/China and Brexit talks. Value stocks and recently lagging sectors led the market back near all-time highs. Energy, financials, retail, transports, small- and mid-caps posted 3.4%-6.2% gains. The trade-sensitive Philadelphia Semiconductor Index gained 2.4%. Meanwhile, US Treasuries, “overpriced” growth stocks, and defensive-oriented stocks fell out of favor. Information technology, consumer staples and real estate finished in negative territory.
Stronger-than-expected August core CPI pressured bond yields, steepening the yield curve (i.e., further from inversion). The US 10-year Treasury soared to 1.90%, up by 35 basis points, while the 2-year rose by 27.
WTI crude oil fell 2.8% to $54.88/barrel. Factors weighing on price included a possibly easing of Iranian sanctions, a lowered OPEC oil demand forecast and lower EU growth forecasts. Today’s attack on the mid-east’s main oil facility, Abqaiq, caused Saudi Arabia to shut down about half its facilities, likely creating a spike in price when the markets open on Monday.
Volatility fell to 13.7 from 15.0 based on the CBOE’s Volatility Index, VIX.
Amid mounting speculation of an interim US/China deal, President Trump said he would at least consider it, though he prefers a comprehensive agreement. Each side took steps to ease tensions ahead of this week’s ministerial talks in Washington, which will prep for high-level talks in early October. China suspended tariffs for a year on certain imports from the US, including agricultural products such as soybeans and pork, cancer drugs and other products. Trump said, at China’s request, he postponed a tariff hike scheduled for October 1 until mid-October to avoid clashing with the People's Republic of China’s 70th anniversary. There was widespread media speculation that a limited, interim trade agreement — e.g., the US freezing or rolling back certain tariffs and China resuming agricultural and energy purchases — will occur in the coming weeks but that major points of disagreement (e.g., Chinese government subsidies for state owned enterprises and theft of intellectual property) will be left unresolved.
Data continued to suggest the consumer could continue to support growth and ward off a recession. Retail sales increased 0.4% in August vs. an expected 0.3%, weekly initial jobless claims remained at historically low levels and September consumer sentiment rebounded.
The Fed meets this week. Recent economic reports have moved the odds in favor of another rate cut happening. President Trump called on the Fed to cut interest rates to zero or less so that the US can refinance its debt and lengthen the debt's term (in the now infamous “boneheads at the Fed” tweet). Treasury Secretary Mnuchin said the administration would consider a 50-year bond next year, not in 2019.
Analysts expect S&P 500 Q3 earnings/share to decline 3.6%. That would be the third straight quarterly earnings decline, and event that hasn’t happened since the Q4 2015 through Q2 2016 period.
The European Central Bank (ECB) announced a package of “quantitative easing” measures:
- Pushed its deposit rates more deeply negative, to -0.50% from -0.4%
- Resumes buying back bonds at a monthly pace of €20 billion
- Sweetened the terms of cheap loans to the banking sector, and
- Saying rates will stay low until inflation nears the ECB's 2% target
Outgoing ECB president Mario Draghi suggested that the ECB had exhausted its policy tools. He appealed to Eurozone governments to take the lead in shoring up Europe's economy via more proactive fiscal policy now. Former IMF Managing Director Christine Lagarde will replace Draghi in November.
The UK and Brexit
UK recession fears eased as the economy expanded faster than expected in July, growing 0.3%, up from June's flat reading. More notably, signs of flexibility emerged on both sides of Brexit talks that may break the stalemate. To keep its Irish border open, Northern Ireland could be treated differently than the rest of the UK. Previously, a key faction in the UK’s ruling Conservative coalition had objected to separate treatment for Northern Ireland. With Parliament suspended after PM Johnson’s latest political setback, any agreement would need to be rushed through the legislature before the October 31 deadline.
Profit margins in China are under pressure as plunging producer prices limit pricing power amid declining input costs. A steady drip of stimulus designed to limit the damage from the trade war is expected.
Reuters reports that the Bank of Japan may be open to debating additional easing measures.
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