Market Update - December 11, 2018Submitted by Jodi Vleck , Beta Wealth Group on December 10th, 2018
In a topsy turvy week marked by one less trading day, markets experienced a rather rough start to December, with optimism around a potential US-China truce on trade/tariffs following the G20 meeting negated by falling bond yields and news of the arrest of a high-ranking executive at one of China's leading technology companies, which had the potential to inflame US-China trade relations. On the economic front, strong ISM manufacturing/services numbers were offset by weaker-than-expected November employment data and factory orders. From a sector standpoint, Utilities led the way with virtually every other sector down for the week with financials and industrials being the weakest performers, as investors fretted about the impact of lower interest rates and Chinese tariff uncertainty respectively.
Fears about global trade spilled over into weaker performance in foreign markets, with Europe, U.K., Japan and Emerging Markets all suffering pronounced declines, with Thursday’s 3% declines in Europe and the U.K. representing the worst trading day in nearly two years. Brexit uncertainty continued to drive negative sentiment in the U.K, and Germany’s markets reached bear market territory driven by its reliance on its export-heavy economy, particularly the automotive sectors and financials.
U.S. fixed income markets were the beneficiary of investor flows away from risk assets, notably treasuries, while credit spreads widened in the corporate high yield market. US fixed income investors were spooked by inversion across a portion of the yield curve, with the 5-year Treasury yield dipping below the 3-year Treasury yield. While this inversions can happen for a variety of reasons, it has not historically been a good historical predictor of future recessions. On the other hand, foreign bonds fared well in both developed and emerging markets driven partly by the weaker dollar.
Commodities fared well last week with crude oil rising by 3% to end the week at just under $53/barrel, which offset a drop in natural gas prices over the prior few weeks. The crude oil market was led by speculation about OPEC and peripheral non-OPEC members, working on production and inventory cuts to stem the recent supply glut that has kept a lid on pricing.