E Markets: Birthday Candles

Today is my birthday. We all know there is light at the end of the tunnel and at the end of the birthday candle – so today that analogy to markets looks obvious with next week bringing the last full week for 2018 trading and with it regrets along with hopes as central banker decisions from the FOMC, BOE, Riksbank and others likely will dominate.

Fear of failure meets the greed of success daily and in the last week, fear beat greed. There wasn’t much new to add to the fear list last week other than more Trump impeachment fodder, but less to add to greed for US markets even with good retail sales and lower weekly jobless claims. Globally, the Europeans did best with risk as UK PM May blinked and postponed her Brexit deal vote and managed to win a Tory leadership challenge. ECB Draghi delivered a dovish enough message even as the central bank continues its plan to normalize policy by ending QE. The Italian government agreed to lower its budget deficit for 2019 to 2.04% down from 2.4% - perhaps enough to prevent the EU from the EDP (excessive deficit procedure). The weakness of growth in Japan and China led Asia and markets suffered accordingly even though US/China talks continued with some positive signals. The list of fears stands in the way of a Santa Claus risk rally. The candle charts are suggesting more blow off tops than hefty cake to enjoy with 2535 the next target rather than a bounce back to 2700 for year end.  

  • Recession– The odds for a recession in the US economy rose last week despite the modestly better data – JPM Chase grabbed headlines with a 70% odds in 2-years. 

  • Impeachment– Predictit odds of an impeachment fell last week even as the headlines on Trump were worse with the sentencing of Cohen and the press around it.  This begs the question of what political headlines matter in the US – with the Pelosi and Trump meeting an example or the threat of a government shutdown. 

  • Global Trade– Fear that the trade truce between Xi/Trump falls apart continues to drive markets. Trade volumes in the last month are going down – as the CPB world trade monitor shows 1.1% dip in September (its latest report). 

  • Brexit and UK May government.  The last week brought plenty of drama but little change.  The odds for a new government from Labour or a no-deal divorce from the EU remain in play. Another referendum also plays to the market and to the sense of regret shown in polls over the last month.  May is battling with former PM Blair on his call for a new Brexit vote. 
  • EU Politics. Another weekend brings more yellow-vest protests to France even as Macron tried to compromise last week. Polls show Macron losing popularity with Ifop at 23% down 2% last week and Ipsos at 20% off 6%.  
  • Emerging Markets. The FOMC rate hike risk next week, ongoing fears about US/China trade and growth – and ongoing capital outflows suggest further funding and growth issues for 2019. 

Question for the Week AheadAre central bankers the secret Santa? 

The host of central bank decisions this week – with the FOMC leading the charge – leave many hoping that there is a respite for tighter policy and some risk-rally relief into the last of 2018.  This seems temporary at best. The “market tensions we saw during this quarter were not an isolated event,” Claudio Borio, head of the monetary and economic department at the BIS said today. Monetary “policy normalization was bound to be challenging especially in light of trade tensions and political uncertainty,” Borio added in the BIS’s quarterly review.  What seems obvious to 2018 is that central bankers have been intent on policy normalization and that in 2019 this won’t reverse quickly. 

Among the challenges facing the global economy, Borio listed the possibility of rising inflation, the “dark cloud” of lower-rated U.S. corporate debt in an overstretched market and weakness in the European banking sector. The BIS worries will show up in illiquid markets and in credit – with Europe on the front lines.

Market Recap:

Growth fears dominated the week – from weaker China data starting with trade that showed slowing exports and weaker imports to weaker industrial production and retail sales. Europe added to the anxiety with weaker flash PMIs – particularly France with its yellow-vest crisis driving. The US/China trade talks remained front-and-center for investors but Huawei CFO arrest became a Canadian first problem as China detains two Canadians in seeming retaliation. China did return to buying US soybeans and reports are that they are redrafting made in China 2025 plans along with considering cutting auto tariffs – that helped Europe considerably. Japan with its 3Q GDP revision at -2.5% y/y from -1.2% y/y suffered notably and added to the global growth doubts. For the US the data was mixed – Industrial Production rose 0.6% in November more than the 0.4% expected. US PMI flash for manufacturing fell to 13-month lows at 53.9 while services fell to 53.4 – 11-month lows.  US retail sales rose 0.2% in November – better than 0.1% - and greatly influenced by drops in gasoline prices. 

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