Market Talk – January 28, 2019

Asia:

Slightly subdued day in the Asia markets as the Nikkei was down -60bps but still well within the recently formed upwards channel, which started at the beginning of the month. On Sunday the BOJ meeting minutes were released, the minutes showed that the policy makers were disagreeing over the appropriate level of the bond yields. The diverging opinions ranged from raising rates to meet the 2% inflation target. Whereas other members suggested negative rates as the global economy weakens. The JPY yen did strengthen against all major world currencies today bar the Euro.

The Japanese Corporate Services Price Index (YOY) was recorded at 1.1%, slight lower than the expectation rate of 1.2%.

Elsewhere in China, the Hang Seng Index managed to close up +6bps, it was at a similar position to the Nikkei at the time of the Nikkei’s close – therefore a late surge rescued the day. Another somewhat important news was the decision that S&P have been given the go ahead to start rating Chinese bonds, this potentially could start opening up capital flows into the Chinese debt market with a “reputable western” ratings agency leading the charge. Of course more discussions on Chinese trade war with the US are still hugging the headlines. Chinese banks are currently being looked at with a skeptical eye, with questions feared of how will they cope with the Chinese economy slowing to their lowest growth rate in 28 years.

China industrial profits declined for second month running, from a figure of -1.8% in Dec to -1.9% in Jan, which was slight lower than expectations.

Europe:

Quite an eventful day for the European central banks with both the ECB and the BOE chiefs making announcements.  Draghi highlighted the US – China trade war as being a cause of the drag on the European economy. He suggested “clarity and peace” on the situation would help the Eurozone’s growth rate. Draghi went on to mention this coupled with the Brexit ordeal (as it is now becoming) makes the outlook pretty cloudy. This on the back of ending its 4-year stimulus package scheme. There is expectations that no interest rates will be raised until after the summer. Mark Carney hosted a new format Q&A style, addressing questions via their online portal. Many different topics were addressed from forming a new cryptocurrency, of which he explained security is the biggest shortfall in this venture. Financially, he explained the demand for cash would be rising for the foreseeable future.

Overall the European markets were hit with the somewhat pessimistic view from Draghi and all major stock markets was down close to 1%. The Pound weakened against the EUR, JPY, CNY and USD a slight dip from its recent run of form. The EUR, having celebrated its 20^th birthday, seems to be the winner of the day, rising against most major currencies. As expected, data about the lending to the private sector seemed to outweigh the unsurprising but dreary economic outlook. M3 money supply outweighed expectations 4.1% vs 3.8%, which suggests more cash is deposited in banks.

FTSE 100 (-0.84%); DAX (-0.57%); CAC 40 (-0.76%) all closed lower.

USA:

This will be an interesting week in the U.S. with a large portion of companies scheduled to report earnings (over 100 of the S&P 500), including Apple, Microsoft, Amazon and Facebook, among others. So far the majority of reported earnings have been favorable, but have been overshadowed by a number of factors, including the on-again, off-again trade talks with China and warnings of how a slowing Chinese economy’s could impact U.S. corporate profits. And while President Donald Trump has agreed to a temporary re-opening of the Government, uncertainty remains as everyone now looks to see what happens by the February 15 deadline after Trump told the Wall Street Journal on Sunday that another government shutdown is “certainly an option”. According to the Congressional Budget Office (CBO), the 35-day government shutdown (longest in U.S. history) cost the economy an estimated $11 billion, including what could be a permanent $3 billion loss. Good times.

Coming off their fifth straight weekly gain, the Dow and Nasdaq both closed lower on Monday, as did the other major U.S. indices across the board: The Dow closed at 24,528.22 (-208.98, or -0.84%); the S&P 500 closed at 2,643.85 (-20.91, or -0.78%); the Nasdaq (Composite) closed at 7,085.68 (-79.18, or -1.11%); and the Russell 2000 closed at 1,473.54 (-9.32, or -0.63%).

Of course, equities were not alone in the down day. U.S. treasury yields and Oil closed lower on Monday as well. This coming week shall be a very interesting one, as we level set on some key corporate earnings as we keep our eye towards an important February ahead.

Energy:

Continued concerns over slowdown of demand caused Oil (Brent crude) to close lower yet again at $59.93 (-1.71, or -2.8%), but later in the day U.S. Treasury unveiled sanctions on Venezuela’s state-owned oil firm, Petróleos de Venezuela SA (known as PdVSA) as the U.S. digs in its heals backing what it hopes is a changeover to a legitimate government. This could result in a rebound for Oil in the near term as Venezuela maintains the largest oil reserves in the world, but this is an evolving situation and we’ll just have to see how it plays out.

Bonds:

Japan 0.01%(+0bp), US 2’s 2.58%(-6bps), US 10’s 2.73%(-6bps), US 30’s 3.05%(-1bps), Bunds 0.21% (+1bp), France 0.61% (+1bp), Italy 2.69% (+4bp), Turkey 14.81% (-13bp), Greece 4.06% (-2bp), Portugal 1.66% (0bp), Spain 1.25% (+0bp) and UK Gilts 1.28% (-3bp).