18th February 2019 

Stocks did well last week, boosted by optimism around a positive outcome to the US / China trade talks, decent earnings results and the US averting a renewed partial government shutdown. This back-drop saw all markets do well but particularly the more cyclical and trade sensitive such as Europe and Japan. This week is fairly quiet from a data perspective, with some key growth indicators – particularly in the struggling Eurozone – coming out towards the end of the week.

Last week

  • Stocks had another strong week.
  • US earnings were solid but future guidance is weak.
  • Bond markets fairly flat save for high yield.
  • Investor sentiment boosted by optimism around a trade deal.
  • Economic data was generally poor, with the UK being the bright spot.

This Week

  • Continued focus on the Eurozone this week, with business conditions PMIs being released on Thursday as well as inflation data on Wednesday.
  • In the UK, we have employment data out tomorrow, with average hourly earnings and the unemployment rate being the key watch-points. UK unemployment is expected to hold steady at 4% which marks its lowest level since 1975.
  • US markets are closed today for Presidents Day and we have to wait until Wednesday night for the first main data-point; the minutes from the last Fed meeting. We then get plenty of data out on Thursday including home sales and PMIs.

Last Week’s Highlights​

  • Stocks had another good week, helped by further progress on the US / China trade talks, the US averting a renewed government shutdown and some decent earnings results. Global markets were up around 2.8%, with the energy sector leading the way following the big bounce in oil over the week. Europe was the best performing region, up 3.3%, with Japan also doing well; up 2.8% and a further 1.8% this morning.
  • The UK FTSE All Share Index was up 2.4%, with large caps out-performing; helped by the weakness in the pound. Micro Focus was the best performing stock in the FTSE 100 over the week (up 10.6%), with Tui being the worst performing stock (down 11.4%). In the wider All Share Index, Plus500 was the stand-out under-performer, down just over 44%. This fall came on the back of a profit warning and also concerns about new European Union regulations on spread-betting firms.
  • The US December quarter earnings reporting season continued to surprise on the upside over the past week, but it’s still showing a slowdown from previous quarters as the tax boost and underlying earnings growth has slowed. 80% of S&P 500 companies have now reported with 72% beating on earnings with an average beat of 3.3% and 60% beating on sales. Earnings growth is running at 13.1% for the quarter. Companies have generally been pretty bearish in their projections for this quarter’s (i.e. Q1 2019) earnings, with analysts predicting negative growth in Q1 (-2.2%).
  • In Europe, just a little over 20% of companies have reported thus far, with roughly 50% of companies beating earnings and sales estimates and earnings have been growing at a rate of circa 3%.
  • Bond markets were pretty flat last week, with sovereign bonds giving up some ground as risk appetite increased. UK gilts were down by 0.18%, with high yield bonds the stand-out performers, up 0.56%. High yield bonds are now up 5.4% for the year.
  • Sentiment was boosted around a trade deal being reached, or at least the tariff increase (from 10% to 25% on $200bn of Chinese goods) being delayed from its March 1st deadline; potentially by up to 60 days such that a deal can be reached. There were also reports in the press that China was offering to boost its purchases of US semi-conductors in exchange for lower US tariffs. In short, over the course of the week it seemed more likely that some sort of deal would be brokered which both sides would be able to tout as a victory.
  • The US government shutdown was also avoided, with President Trump securing $1.37bn of the $5.7bn he had requested to build the border wall between the US and Mexico. President Trump is expected to sign the bill but is also expected to declare a national emergency in an attempt to shift more funds to border barrier construction.
  • Economic data in the US was generally poor last week. Retail sales in the US dropped by 1.2% in December, which marked the biggest monthly drop since September 2009. This also came alongside some poor data for industrial production and core inflation which held in at 2.2%; all of which should have weighed on sentiment as it points to tighter policy from the Fed.
  • Data in the Eurozone continued its abjectly bad trend, with Germany narrowly missing entering a technical recession following its growth numbers last week. Growth for the fourth quarter in Germany came in at 0.02%. This came alongside Eurozone Q4 December growth of 0.2% (making for 1.2% year-on-year) and a drop of 4.2% in industrial production in December.
  • UK data was pretty mixed, with retail sales growing by 1% in January compared to the month before, bouncing back from the 0.7% drop in December that was revised up from the 0.9% fall originally reported. Growth for 2018 came in at 1.4% which was the lowest rate of growth in a decade and inflation (CPI) fell to 1.8%.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source: Bloomberg.

Global stocks continue their bumper start to 2019: up nearly 9% for the year

Source: Psigma / Bloomberg

Rory McPherson
Head of Investment Strategy