Growth worries vs hopes for a better future
It was an uneasy week for the global markets but stocks managed to stabilize and trim earlier losses ultimately. Global worries persisted and capped investor optimism as more signs of slowing growth continued to emerge. China posted the slowest growth in nearly three decades in 2018 and South Korea’s economy slowed to a six-year low. Moreover, the IMF downgraded 2019 global growth forecast for 2019 to 3.5 per cent and 3.6 per cent for 2020 – 0.2 per cent and 0.1 per cent respectively below its previous prediction. The Fund warned that a no-deal Brexit and a deeper than expected slowdown in China could spark a further deterioration in sentiment and hit global growth.
IMF downgrades 2019 global growth forecast
Strong corporate earnings lift sentiment
US government shutdown ends
Dovish ECB fails to discourage euro bulls
Oil market focused on trade, geopolitics
However, investors managed to shrug off the new bearish signals and shifted their focus to the potentially positive developments in trade. Ahead of crucial talks with China, Trump expressed optimism over preventing further escalation of the trade war over the course of a 90-day truce and striking a final deal. Many investors doubt that a new round of negotiations due next week will bring a significant breakthrough in trade relations between the two countries but there are hopes for some progress towards the deal.
After another portion of dismal Chinese data, the regional stocks suffered a profound sell-off earlier in the week amid increasing concerns. Against this backdrop, the Chinese government decided to step up fiscal spending this year to support its economy, focusing on further cuts in taxes and fees for small firms. Moreover, the finance ministry officials highlighted that the government may unveil more fiscal stimulus during the annual parliamentary meeting in March. As a reminder, Beijing delivered about 1.3 trillion yuan of cuts in taxes and fees last year. The comments by officials helped to prevent a panic in the markets and encouraged a recovery in most shares in the following days.
As such, China A50 index registered the fifth weekly gains in a row and closed the week at early-December highs around 11,250. After a break above the 11,000 handle, the technical picture has improved marginally. However, the index needs to confirm a break above the mentioned high to proceed with the recovery from May 2017 lows registered in early January. As for the Japanese Nikkei 225, the index failed to close in the positive territory in the weekly charts despite a decent recovery from an aggressive sell-off in the early part of the week amid a general risk-off sentiment. The Bank of Japan cut its fiscal 2019 inflation outlook once again in an evidence that the central bank’s efforts to stoke consumer prices suffered yet another setback. On the one hand, it looks positive for stocks as weak inflation pressures are further dashing hopes that the bank’s ultra-loose monetary policy will end anytime soon. On the other hand, this step reinforces concerns over the health of the economy, especially on the back of bearish signals from China and its trade spat with the US.
US stock markets rallied in the second half of the week but It was not enough to send the major indexes back into positive territory. Dow Jones and Nasdaq finished flat, while S&P500 turned red after four weeks of gains. Quarterly earnings were mixed-to-positive. The world's largest chipmaker, Intel reported record EPS, net income and full year revenue but missed Q1 guidance, which frustrated investors and sent the company’s shares tumbling. As a reminder, Intel has been without a permanent CEO since June 21, when Brian Krzanich resigned after an investigation revealed that he had an improper relationship with a company’s employee. Meanwhile, within the restructuring of its unit under new leadership, Apple reported firing of 200 plus employees from its autonomous vehicle group Project Titan. Starbucks reported revenue and profit growth with the help of a strong holiday season.
Trump ended the US government shutdown which was the longest in the country’s history. The President signed a bill to reopen the government through February 15. The news gave some lift to risky assets, including stocks. However, investors remain cautious as is not yet clear what kind of a deal can be struck between Democrats and Republicans in the weeks to come over border security. Democrats support border security measures, but not new funding for a border wall. So the uncertainty remains high in this front and markets do not rule out resumption of a shutdown. if lawmakers do not craft a deal Trump likes, he has threatened two possible next steps: another shutdown, or declaring a “national emergency”. So the lingering political risks will continue to cap investor optimism in the days to come.
The ECB meeting was somehow of a wait-and-see stance but leaning to the dovish side. The central bank left its key interest rates unchanged and reiterating that they expect them to remain “at their present levels at least through the summer of 2019, and in any case for as long as necessary.” The most interesting change in the statement was the fact that the ECB changed the balance of risks on growth to the downside. As a confirmation that central bank’s cautious approach is reasonable, manufacturing and services data from the Eurozone disappointed. France’s services PMI fell to a five-year low, while Germany’s manufacturing activity entered the contraction territory at the level of 49.9 — the lowest since June 2013. The euro was hit by the combination of the ECB tone and another portion of dismal data but recovered strongly in the end of the week amid a widespread dollar weakness.
The greenback finished the week on the back foot against major counterparts. Against the backdrop of aggressive Trump’s foreign policy and the escalating political crisis in Washington, the currency is gradually losing its appeal as a safe-haven asset, which makes the dollar vulnerable in times of market stress as well. Apart from political issues, the decline in the buck was in part due to expectations of a dovish FOMC meeting next week.
EURUSD finished marginally above the 1.14 barrier on Friday and could retarget the 1.15 resistance in the days to come should the dollar continue to lose ground. By the way, apart from a potentially dovish tone by the Fed, the expected progress in the US-China trade talks could play against the dollar and encourage more euro buying amid risk-on sentiment.
After three weeks of a spectacular recovery from the lows around $50, Brent crude turned negative and suffered measured losses in the weekly charts. The prices once again faced a psychological resistance at $63 but managed to stay above the important support around $60 and trimmed losses by the end of the week. On the one hand, the downside pressure is limited by the increasing speculations about the political crisis in Venezuela and the threat of new US sanctions against the country’s energy sector. Further contraction of output in Venezuela could play into the hands of OPEC+ deal aimed at rebalancing the global oil market. On the other hand, crude oil inventories continue to increase, while production jumped to a record 11.9 million bpd this month. Further rise in the US shale companies’ activity will continue to cap the upside potential in prices. The additional source of concern for oil bulls is the US-China trade war.
Next week is going to be even busier for global investors bracing for the outcome of US-China trade negotiations, government-shutdown headlines Fed’s policy meeting, major earnings reports and economic data, including the NFP employment report on Friday.