Global Markets

Geopolitical events were once again affecting markets during the week. News regarding Chinese and United States trade negotiations lifted equities at week’s end. The UK government survived a vote of confidence (barely) but lost the Parliamentary vote on its Brexit agreement. The partial government shutdown in the U.S. began to weigh on economic growth. Unpaid government employees are increasingly suffering hard times. Earnings season began during the week with mixed results. However, on the week, most equity indexes advanced.

Global Stock Market Recap

Europe and the UK

European equity indexes advanced across the board and ended the week on a buoyant note Friday. Investors indulged in hectic buying amid increasing signs of progress in the United States and China trade talks and fairly good earnings reports from U.S. companies so far. The FTSE was up 0.7 percent, the CAC added 2.0 percent, the DAX jumped 2.9 percent and the SMI was 2.2 percent higher.

British Prime Minister Theresa May’s Brexit deal suffered a heavy defeat in parliament but she survived a subsequent vote of confidence, removing some political uncertainty for now. However, longer-term prospects for Britain and its markets remained far from clear. The likelihood of extending the article 50 deadline beyond March 29 looks increasingly possible. However, as the UK government attempts to come up with new proposals to pitch to a European Union that has stated no intention to renegotiate anything, the uncertainty will remain lively and volatile. Downing Street has announced that the vote on the new Brexit proposals (whatever they might be) will be on Tuesday, the 29th of January.

Asia Pacific

Equities advanced on the week (with the exception of the SET) as progress was reported in Chinese and United States trade talks. Stronger than expected economic data from the U.S. also helped ease global growth worries. The Shanghai Composite was up 2.3 percent and the Hang Seng added 1.6 percent on the week. The Nikkei and Topix were up a weekly 1.5 percent and 1.8 percent respectively. The yen weakened on improved risk appetite after reports that the U.S. could lift some trade tariffs on China.

On Thursday, The Wall Street Journal reported that U.S. Treasury Secretary Steven Mnuchin discussed lifting some or all tariffs imposed on Chinese imports and suggested offering a tariff rollback during trade discussions scheduled for January 30. U.S. stocks rallied following the report, but pared some of those gains after a Treasury spokesperson told CNBC that Mnuchin had not made any such recommendations. WSJ also reported that U.S. Trade Representative Robert Lighthizer has resisted Mnuchin’s idea.

A worrisome sign has been weakening growth in the Chinese economy. Fourth quarter gross domestic product will be reported on January 21 (Monday local time). Growth has likely slowed to the weakest pace since the global financial crisis as demand faltered both at home and abroad. On Friday, China’s statistics bureau revised down its final 2017 gross domestic product (GDP) growth to 6.8 percent from 6.9 percent after scaling back initial estimates of the industrial and services sector. Expectations for fourth quarter growth are 6.4 percent, down from 6.5 percent in the third. Growth worries resurfaced after Chinese Premier Li Keqiang said the country is facing a challenging environment.

Japanese Finance Minister Taro Aso urged the Group of 20 major economies to renew their commitment to cooperation in the face of rising protectionism. Speaking at the G20 meeting of deputy finance ministers and deputy central bank governors before the finance leaders’ meetings under Japan’s chair later this year, Aso warned that protectionism and unfair trade practices would undermine economic stability. Japan wants to focus on issues ranging from global trade imbalances to the impact of aging populations on the agenda when it chairs this year’s G20 financial leaders meetings. Japan will host a G20 financial chiefs’ meeting in Fukuoka in western Japan on June 8 and 9, followed by a leaders’ summit in Osaka on June 28 and 29.

Currencies

The U.S. dollar was higher against the yen, euro, Swiss franc and the Australian dollar but declined against the Canadian dollar and the pound sterling. The British currency rose to a two-month high against the euro on Thursday, extending recent gains on growing expectations that Britain can avoid a no-deal Brexit. In a tumultuous week for British politics, Prime Minister Theresa May’s Brexit deal suffered a heavy defeat in parliament but she won a subsequent vote of confidence removing some political uncertainty.

Although many options remain including fresh elections or even a second referendum vote, analysts believe the risks of a hard no-deal Brexit have receded considerably despite the headlines. The Labour Party could back a second Brexit referendum if its proposals for leaving the EU are shunned by the government and a no-deal scenario looks likely. Generally the market is more optimistic that following the heavy defeat, the U.K. will head towards a softer or no-Brexit outcome. Trading in the currency options markets shows an increasing bias towards bets that Britain will extend its deadline to leave the European Union — a positive sign for sterling in the near term.

Selected currencies — weekly results

Indicator scoreboard

United Kingdom

December consumer price index was up a monthly 0.2 percent and 2.1 percent on the year after 2.3 percent in November. The decline in the yearly rate was largely attributable to transport where prices rose just 0.8 percent on the month after a 2.3 percent jump a year ago. Weaker fuel charges were a major factor here. Other smaller negative effects were provided by alcohol and tobacco (minus 1.1 percent after 0.5 percent) and miscellaneous goods and services (minus 0.3 percent after 0.0 percent). Upside pressure was mainly concentrated in restaurants and hotels (0.3 percent after minus 0.1 percent). As a result, the core CPI rose a monthly 0.3 percent for a 1.9 percent annual rate, a tick higher than last time. This was its first increase since August but still its fourth consecutive reading below 2 percent.

December retail sales declined a monthly 0.9 percent, their worst performance since May 2017, and so reversed the most of November's downwardly revised 1.3 percent bounce. Annual growth slowed from 3.4 percent to 3.0 percent. Excluding auto fuel, purchases declined a sharper 1.3 percent from their mid-quarter level and were 2.6 percent weaker than a year ago. In line with total sales, this was their third drop in the last four months. The underlying picture was a good deal softer as, excluding auto fuel, non-food demand tumbled a sizeable 2.3 percent. Within this, other stores (minus 6.3 percent) had a woeful time and there were hefty falls too in non-store retailing and household goods (both minus 2.3 percent). Non-specialized stores (0.6 percent) showed the only rise of note. Elsewhere, food was up 0.2 percent while auto fuel jumped 2.6 percent.

Asia/Pacific

Japan

November private sector machinery orders (excluding volatile items) were flat on the month (seasonally adjusted), weakening from growth of 7.6 percent in October. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. Manufacturing orders fell 6.4 percent on the month after increasing 12.3 percent in October, while non-manufacturing orders (excluding volatile items) rose 2.5 percent after growth of 4.5 percent previously.

China

December merchandise trade surplus widened from US$44.71 billion in November to US$57.1 billion. This is the fourth consecutive increase in the trade surplus and the largest since 2015, potentially exacerbating trade tensions between China and the United States. These tensions also appear to have had an impact on trade flows in December, with growth in both Chinese exports and imports declining substantially. This likely reflects the impact of strong trade flows made before the introduction of higher tariffs earlier in the year. Exports dropped 4.4 percent on the year, weakening sharply from an increase of 5.4 percent in November. Imports declined even more sharply, down 7.6 percent after advancing 3.0 percent in November. In domestic currency terms, China's trade surplus widened from CNY305.7 billion in November to CNY394.99 billion in December. Exports increased by 0.2 percent on the year in December after advancing 10.3 percent in November, while annual growth in imports in yuan terms slowed from an increase of 7.9 percent to a fall of 3.1 percent. For the year 2018, China's exports rose 9.9 percent in 2018 while imports grew 15.8 percent. China's trade surplus narrowed from $422.5 billion in 2017 to $351.8 billion in 2018, the smallest annual surplus since 2013. In bilateral terms, however, China's trade surplus with the United States increased from US$277.9 billion in 2017 to a record-high US$324.5 billion in 2018, another factor that could add to trade tensions.

Americas

Canada

December consumer price index slipped 0.1 percent on the month and was up 2.0 on the year — after November’s 1.7 percent. By contrast, core inflation was unchanged. Excluding food and energy, a 0.3 percent monthly decline left the yearly rate stable at 1.7 percent while the amongst the BoC's underlying gauges, the CPI-common and trim were flat at 1.9 percent and the median steady at 1.8 percent. Despite a drop in energy (minus 3.7 after minus 1.3 percent), jumps in annual inflation in food (2.9 percent after 2.2 percent) and household operations, furnishings and equipment (2.1 percent after 0.9 percent) easily provided a more than offsetting boost. Seasonally adjusted, the CPI was 0.2 percent firmer than in November. Within the basket, the main upward pressure came from food and health and personal care, both subsectors advancing 0.6 percent. Elsewhere monthly moves were only small with transportation (minus 0.1 percent) recording the only decline. Even so, excluding food and energy, the seasonally adjusted CPI was up a relatively firm 0.4 percent.

Bottom line

Equities managed to advance despite the formidable headwinds from Brexit and the fractious trade negotiations between China and the U.S. With the deadline of March 29 fast approaching, Brexit will be front and center for market attention. And the partial government closure in the U.S. has investors worried about slowing economic growth, not only in the U.S., but globally as well.

U.S. markets will be closed Monday for Martin Luther King Jr day. The World Economic Forum in Davos Switzerland begins Tuesday with the U.S. absent from the gathering. The Bank of Japan announces its monetary policy on Tuesday. Besides the 800,000 federal workers struggling to get by without a pay check, another casualty of the U.S. government shutdown is the data. Now it is more difficult to discern which way the economic wind is blowing given the lack of numbers from the Bureau of Economic Analysis and Census Bureau.

Looking Ahead: January 21 through January 25, 2019

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