Global Markets

Equity investors continue to be distracted by geopolitical issues. They include the ongoing trade negotiations between China and the United States, the partial shutdown of the U.S. government and its possible knock-on effects on the U.S. economy and of course, Brexit.

The word of the week is ‘patience’ as investors took heart in the use of the word by Federal Reserve speakers and Chairman Jerome Powell. It relieved tensions stemming from the possibility that the Fed would continue to increase the fed funds rate unabated into 2019. Analysts are no longer forecasting fed funds rate increases for the January and February FOMC meetings. Equities advanced for the week around the globe.

Bank of Canada

As anticipated, the Bank of Canada kept its key interest rates unchanged, leaving the benchmark overnight rate at 1.75 percent, the deposit rate at 1.5 percent and the Bank Rate at 2.0 percent. In the wake of the recent slide in energy prices and its potential implications for the domestic economy, a stable monetary stance had seemed all but certain.

Forward guidance also followed December's line and so again indicated that the Bank ‘‘continues to judge that the policy interest rate will need to rise into a neutral range to achieve the inflation target'' while ‘‘the appropriate pace of rate increases will depend on a number of factors.'' In other words, higher interest rates are still anticipated at some point but the pace of increase remains unclear with prospective oil market developments playing a key role.

Outside of oil, the Canadian economy was judged to be performing quite well. Official expectations for economic growth have been trimmed slightly for 2019 but an above potential rate is forecast for next year.

The BoC's updated Monetary Policy Report (MPR) indicates that the central bank is suitably cautious about, but not fazed by, the potential economic effects of the slide in oil prices. Global oil prices are around 25 percent lower now than at the time of the October MPR. Compared with the October edition, the new central bank forecast shows a temporary dip in growth in 2019 but a solid rebound thereafter. Real GDP is now seen expanding at an annual rate of 1.7 percent in 2019 and 2.1 percent next year, down from 2.0 percent and up from 1.9 percent respectively last time. In other words, the oil price impact is expected to be relatively short-lived.

Global Stock Market Recap

Europe and the UK

Equities here weakened as the week progressed reflecting growing concerns about the U.S. government shutdown, a Brexit impasse and the lack of any clear resolution to the trade talks between the U.S. and China. However, on the week, equities advanced. The FTSE was up 1.2 percent while the CAC and DAX were up 0.9 percent and 1.1 percent respectively. The SMI jumped 2.6 percent. Investors here looked across the pond to the U.S. for news.

A statement from the office of U.S. Trade Representative Robert Lighthizer said meetings were held as part of an agreement between President Donald Trump and Chinese President Xi Jinping to engage in 90 days of negotiations with a view to achieving needed structural changes in China. The statement said the talks included discussions on China's pledge to purchase a substantial amount of U.S. goods and services but did not provide any details about the tone or outcome of the meetings.

"The United States officials conveyed President Trump's commitment to addressing our persistent trade deficit and to resolving structural issues in order to improve trade between our countries," the statement said. The statement indicated the delegation led by Deputy U.S. Trade Representative Jeffrey Gerrish will now report back to receive guidance on the next steps. Meanwhile, a statement from China's Commerce Ministry described the talks as "extensive, in-depth and detailed" and said the meetings "laid a foundation for the resolution of each other’s concerns."

Investors also evaluated Brexit risks and the Fed's future path of interest rate increases. The UK Parliament agreed Wednesday that the government must come up with a new Brexit plan within three days if Prime Minister Theresa May's current proposal is voted down.

Eurozone unemployment rate unexpectedly eased in November to its lowest level in more than a decade. The seasonally adjusted jobless rate eased to 7.9 percent from 8 percent in October. Germany's merchandise trade surplus grew in November to its biggest level in five months as imports fell unexpectedly and exports decreased, giving further evidence of a slowdown in the biggest euro area economy.

Asia Pacific

Asian stocks ended mostly higher after China's commerce ministry said trade talks with the United States in Beijing were extensive and helped to establish a "foundation" to resolve differences. Prospects for more Chinese stimulus to arrest the slowdown in growth and growing expectations that the U.S. Federal Reserve will pause its rate tightening cycle this year also underpinned sentiment.

The Hang Seng ended higher on Friday on signs of progress in Sino-U.S. trade negotiations and as U.S. Federal Reserve Chairman Jerome Powell reiterated that the Fed would be patient about interest rate increases. Investors pinned their hopes on the U.S. and China reaching a trade deal after their latest round of talks. Following the discussions, which concluded Wednesday, China's Commerce Ministry released a positive statement and U.S. Treasury Secretary Steven Mnuchin reportedly said Chinese Vice Premier Liu He is expected to visit Washington later this month for further negotiations.

The appetite for equities was further boosted by Fed Chairman Jerome Powell's comments during the week that low inflation allowed the Federal Reserve to be more patient on rates. Those statements were further reinforced by the December Fed FOMC meeting minutes released mid-week. The minutes revealed that many policymakers were of the opinion that in light of the tame inflation and the recent financial market volatility, the "timing of future policy firming (was) less clear than earlier."

Currencies

The U.S. dollar tumbled on the week as safe haven needs appeared to ebb. But even though the dollar declined, the Swiss franc and yen held their safe haven popularity and increased against the U.S. currency on the week. The dollar’s decline was attributed to the possibility that the Federal Reserve will postpone further rate increases going forward.

The pound jumped Friday on growing expectations that Britain will seek to delay its scheduled departure date from the European Union. Prime Minister Theresa May’s spokeswoman denied a newspaper report that knocked sterling off highs but it remained up on the day, with analysts citing a growing sense among some investors that Britain will not be leaving the EU on March 29. Data published Friday showed Britain’s economy cooled in the three months to November, but the focus remained on May’s efforts to get her Brexit deal through parliament.

A series of setbacks suffered by May in parliament ahead of the vote on her Brexit deal next week had pushed sterling to a one-week low against the euro before London’s Evening Standard, quoting British cabinet ministers, reported that Britain could extend Article 50, which determines the exit date. Parliament is due to vote on May’s withdrawal deal, agreed with Brussels, on January 15, but the prime minister looks set to lose the vote.

This week’s Fed minutes, which underscored the U.S. central bank’s flexibility on monetary policy, triggered dollar selling that lifted the euro and propelled it past a 100-day moving average for the first time in three months. The Fed chairman said Thursday in a forum at the Economic Club of Washington that the U.S. central bank intends to shrink its balance sheet further, suggesting it is not done tightening monetary policy just yet.

Data showing U.S. consumer prices in December fell for the first time in nine months in December had little impact on the market, but it backed the Fed’s cautious stance about raising rates this year.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

The December economic sentiment index (ESI) declined once again for the worst run since 2008/09. The economic sentiment (ESI) ended 2018 at a weaker than expected 107.3. This was 2.2 points short of its November mark — nearly 8 points shy of its reading a year ago and the lowest level since December 2016. However, at least it was still above its long-run average (100). The year-end drop reflected softer morale in industry (1.1 after 3.4), services (12.0 after 13.4), construction (7.2 after 8.2) and in the household sector (minus 6.2 after minus 3.9). Only retail (0.0 after minus 0.5) saw any improvement. Nationally, the ESI was lower in France (102.8 after 104.8), Germany (109.9 after 111.8), Italy (104.9 after 105.9) and Spain (104.1 after 107.1). With the Netherlands (108.0 after 108.3) also losing ground, the ESI declined in all five of the largest Eurozone members. However, inflation developments were more mixed. Expected selling prices rose in manufacturing (12.3 after 11.2) and services (10.6 after 9.9), both climbing to multi-month highs. Against that, household inflation expectations (18.6 after 21.1) eased to a 4-month low.

Germany

November manufacturing orders declined 1.0 percent on the month following a marginally smaller revised 0.2 percent increase in October. This was their first decline since August and reduced annual growth from minus 3.1 percent to minus 4.3 percent. Within the monthly headline decrease, capital goods gained 1.4 percent but consumer goods were down 3.2 percent while intermediates were off some 4.4 percent. However, domestic orders were up 2.4 percent, although even that failed to fully reverse the previous period's 3.8 percent slide, its sharpest fall since June and dominated by an 11.6 percent slump in the rest of the Eurozone.

November industrial production tumbled a monthly 1.9 percent — its second worst performance since August 2014 and that after a steeper revised 0.8 percent drop in October. Annual growth declined sharply from 0.5 percent to minus 4.6 percent. To make matters worse, November's monthly drop was broad-based. Capital goods were down 1.8 percent, intermediates 1.0 percent and consumer goods 4.1 percent. Energy shrank 3.1 percent and construction was off 1.7 percent. Industrial production is now at its weakest level since January 2017 and has contracted for three months in a row and in five of the last six.

Asia/Pacific

Australia

November merchandise trade balance surplus narrowed from a revised A$2.013 billion in October to A$1.952 billion. In seasonally adjusted terms, the value of exports rose 1.4 percent on the month to A$38.45 billion after increasing by a revised 1.1 percent in October. Stronger headline growth largely reflected a smaller decline in rural goods exports (around 15 percent of the total). These were down 0.9 percent on the month after dropping 7.2 percent in October. Non-rural goods (around 60 percent of the total) fell 0.7 percent on the month after advancing 4.0 percent previously, while exports of services (just over 20 percent of the total) recorded steady growth on the month of 0.7 percent. Seasonally adjusted imports grew 1.7 percent on the month to A$36.52 billion slowing from revised growth of 3.4 percent in October. This drop in headline imports growth was largely driven by weaker growth in capital goods and intermediate and other merchandise goods, offset by stronger growth in consumption goods and a slightly smaller declined in services imports.

China

December consumer price index increased 1.9 percent on the year, down from 2.2 percent in November. The index was flat on the month after falling 0.3 percent previously. Food price rose 2.5 percent on the year for a second month while the annual change in non-food prices slowed from 2.1 percent to 1.7 percent. Weaker growth in non-food prices was largely driven by a sharp slowdown in transport and communication prices, down 0.7 percent on the month after increasing 1.6 percent in November. Price changes were relatively steady in other categories of spending.

Americas

Canada

The merchandise trade balance deteriorated for a fourth successive month in November. At C$2.06 billion, the shortfall was up C$1.21 billion from October's smaller revised reading and the largest since May. The deterioration reflected mainly a marked drop in the surplus with the U.S. where the black ink shrank from C$3.53 billion to C$2.18 billion. Other regional balances were little changed. Exports continued to slide, a 2.9 percentage monthly drop compounding the declines already seen in the previous three months. Inevitably, energy products (minus 9.2 percent) did the bulk of the damage as crude oil prices dropped a further 13.9 percent. Metal ores and non-metallic minerals (minus 6.6 percent), basic and industrial chemical, plastic and rubber products (minus 7.5 percent) and forestry products and building and packaging materials (minus 5.7 percent) also fell heavily. Combined, this masked respectable gains in consumer goods (2.2 percent) and industrial machinery, equipment and parts (3.3 percent). Export volumes dropped 1.8 percent. Imports were off only 0.5 percent with declines in energy (1.8 percent) swamped by metal ores and non-metallic minerals (minus 18.6 percent) but partially offset by a jump in aircraft and other transportation equipment and parts (21.2 percent). Volumes were down 0.3 percent.

Bottom line

The partial government shutdown in the U.S. continued. As a result, many economic indicators outside the Department of Labor were postponed to sometime after the shutdown ends. Indicators from Europe were mixed with those from Germany — manufacturing orders and industrial production — particularly disappointing. French data were also down along with the UK.

Next week will present the same difficulties in the United States. Data from the Eurozone and the UK dominates the coverage. A key Brexit vote in Parliament will garner the most attention. China continues to release key December data building up to the fourth quarter GDP release. Once again geopolitical issues will attract attention. Germany will publish its first estimate of fourth quarter growth and will give a view as to whether the country suffered a technical recession. Earnings season begins!

Looking Ahead: January 14 through January 18, 2019

Anne D Picker is the author of International Economic Indicators and Central Banks.