13th January 2020

Markets got a boost last week as tensions between the US and Iran eased. This saw oil prices come off markedly and US and emerging market stocks rally as safe-haven bonds sold off. This week, the focus stays on the US, but China returns to the spotlight; with the signing of the phase-one trade deal and some key Chinese data towards the end of the week.

Last Week

  • Stock markets bounced as tensions eased.
  • Core bond markets sold off as yields drifted higher.
  • US jobs data was a touch disappointing but still reported decent growth.
  • Economic data showed signs of continued improvement.
  • Oil prices dropped significantly.

This Week

  • The key event for this week is likely the signing of the phase-one trade deal between China and the US on Wednesday.
  • US earnings season kicks off with the big US banks reporting from tomorrow onwards.
  • In the UK we have inflation and retail sales data out (Wednesday and Friday respectively).
  • China has a fair chunk of data out this week, with retail sales, fixed asset investment, industrial production and growth numbers all being released at the end of the week.

Last Week’s Highlights​

Stock markets had a good week, save for UK equities which were dragged down by the domestic FTSE 250 Index (which fell nearly 2%). Global stocks were up close to 0.9%, with the US and emerging markets leading the way; powered by healthcare and technology shares. The US market clocked another record high, with the S&P 500 closing at 3,274.70 on Thursday. Having been the laggard last year, emerging markets are the best performing region so far this year; up over 3%.

Bond yields drifted higher last week as tensions eased between the US and Iran. UK gilts sold off by 0.5%, whilst credit spreads narrowed and emerging market debt did well too. In a similar fashion to their equity counterparts, emerging market debt is the best performing area of the bond markets so far this year.

The closely watched US jobs data was a bit disappointing but still a fairly solid number. 145,000 new jobs were shown to have been created in the US in December which was below estimates for a gain of 160,000. Wage data was particularly weak, with average hourly earnings rising just 0.1% in the month which made for the worst showing since September 2019. This confirmed the case of low inflation pressures in the US, with bond futures markets pricing in one further interest rate cut this year (in the November or December meetings). Meanwhile, unemployment remained at the half-century-low of 3.5%.

Economic survey data showed continued signs of improvement; notably in the eurozone. The composite Purchasing Managers’ Index (PMI) came in at 50.9 (anything above 50 is deemed to be “expansionary”), with the services index rising to 52.8 from 51.9. Manufacturing data remained in decline however, with the index shrinking for an 11th consecutive month. Eurozone inflation data (CPI) also came in relatively strong at 1.3%; a six month high, although still some way below the European Central Bank’s inflation target of “below, but close to 2%”.

Oil prices fell by -6.4% on the week, as tensions between the US and Iran eased, with President Trump stating that “Iran appears to be standing down.”

Earnings season kicks off in the US this week, with analysts expecting a decline of -2% in Q4. If this comes to pass it would mark four consecutive quarters of negative earnings growth which hasn’t happened since the period from Q3 2015 through to Q2 2016. For us, evidence of earnings growth is key given that the valuation of the US market is 18.4 times forward P/E. This is above both the five year average (16.7) and the 10 year average (14.9).

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.

Another week, another record high for the US stock market: up over 28% in the last year.

Source: Bloomberg

Rory McPherson
Head of Investment Strategy