10th December 2018

Last week was a roller coaster ride for stock markets, with an initial rally soon fizzling out as recessionary fears were re-ignited. Share markets finished in deep negative territory, with the US on the bottom of the pile; weighed down by banking shares in particular. This week the spotlight is likely to fall on the UK, with the key focus being the likely Brexit vote in the Commons tomorrow.

Last week

  • Share markets fell heavily
  • Bond markets rallied
  • US yield curve got to the flattest level since 2007
  • Oil got a boost as OPEC agreed cuts
  • US / China trade relations took a turn for the worse

This Week

  • The big focus for this week will be tomorrow’s Brexit vote in the House of Commons.
  • The European Central Bank meets on Thursday and is expected to confirm that it will end quantitative easing this month, but it’s likely to commit to re-investing maturing bonds for an extended period, indicate that it will provide more cheap funding for banks if needed and reiterate that a rate hike is a long way away.
  • In the US, inflation data (CPI) on Wednesday and retail sales (Friday) are the key releases before the central bank meets next week.

Last Week’s Highlights​

  • After initially rising on the positive outcome from the Trump/Xi meeting over the previous weekend, share markets finished the week sharply down. The US was the worst performing market, down 4.6%, with emerging markets faring best, but still losing just over 1% on the week. Banks were the worst performing sector, being the biggest casualty of a flattening yield curve which affects their ability to make money by borrowing short-dated money and lending it out for longer periods.
  • Bond markets had a really strong week as yields fell considerably. UK government bonds rose by 2.3%, with US Treasury bonds up 1%. This fall in bond yields came as the futures markets reacted to softer recent economic data and scaled back their expectations for rate hikes next year.
  • The US yield curve flattened to its tightest level since summer 2007, as 10 year yields fell heavily over the week. This is often seen as an advanced indicator of recession and it added to market pessimism. Typically, an inverted yield curve has preceded a recession by around 15 months, with share markets being about three to six months ahead of the onset of the recession.
  • The US jobs report on Friday showed that there were 155,000 new jobs added in November (less than the 198,000 expected), with the unemployment rate holding steady at its 49 year low of 3.7%. Last month, average hourly earnings rose less than expected, just 0.2% (3.1% year-on-year), a sign that wage pressures remain muted despite the historically low unemployment rate. This kept the pressure off rising rates in the US. Current market estimates are suggesting a 71% chance of a rate hike by the US Fed at their 19th December meeting but then for no further hikes to come in 2019; a big shift from recent views and from the three hikes that the Fed themselves have suggested.
  • OPEC gave the oil price a late boost at the end of the week, with the cartel and Russia agreeing on a production cut of circa 1.2 million barrels per day. This was slightly more than expected and helped push up the oil price by 2.2% on Friday, and 3.3% for the week.
  • Trade relations between the US and China took a turn for the worse following a seemingly successful G20 meeting the week prior. President Trump took to Twitter and questioned whether a “real deal” was possible and also referred to himself as a “Tariff man”! Optimism was further dented on Thursday following the arrest of a high-profile executive of Chinese telecom giant Huawei on suspicion of violating Iranian sanction. Huawei has 12% of the global market and is second to Samsung in volume terms. The group is also the fifth largest buyer of semiconductors in the world (3.5% of demand).

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.

US yield curve got to flattest level since the summer of 2007


Source Psigma / Bloomberg.