Market Update - January 8, 2019Submitted by Jodi Vleck , Beta Wealth Group on January 7th, 2019
For the week ended January 5, US equity markets recovered after starting off on the wrong foot, with Apple's revenue/earnings guide down on Wednesday and weakness in PMI data being offset by Friday’s strong and better-than-expected jobs numbers, dovish Fed talk and reports from China’s commerce ministry that trade talks with the US will resume this coming week. By sector, energy names rebounded with a 5% gain followed by strength in telecom and consumer services, while the utilities and technology sectors lagged the most, with the latter brought down by Apple's dour news regarding slowing of the Chinese economy and the negative impact that was having on the company's iPhone sales.
FOMC Chair Jerome Powell effectively saved the day (or week) through his comments at the American Economic Association, where he alluded to a more measured market-sensitive approach to implementing monetary policy i.e. that they are not on a ‘preset path’ to raising rates or shrinking the balance sheet, which was in stark contrast to his comments in December and October. This was interpreted by market participants as a sign that the Federal Reserve might be getting ready to pause the pace of rate increases, given what appears to be an environment of slower growth. While in the short-term, the Federal Reserve's messaging restored some calm to markets, longer-term market reaction will dependent on actual Fed policy action on rate increases and balance sheet activity.
Foreign equities gained, albeit to a lesser degree than U.S. equities in local currency terms, but were boosted a bit further by a weaker dollar. Recent market reaction has be driven by optimism around the U.S.-China trade tensions being resolved, as well as issues such as Brexit. Emerging markets ended the week down in local currency terms, which translated into a modest positive after accounting for a weaker dollar, with weakness in Asia ex-Japan offset by strong market performance in Russia and Brazil driven by commodity price stabilization and in the case of the latter, optimism over the new Brazilian president potentially addressing deregulation and government pension reform which have constrained potential economic growth over the past few years. Also worthy of note was the Chinese central bank lowering bank reserve requirements by a percentage point to 13.5%, which has the monetary effect of easing, since it stood to inject nearly $120 billion into the economy through increased implied lending activities.
U.S. bonds generally gained ground as yields ticked lower driven by dovish Fed comments, which tempered the expected path of rate increases in 2019. Interestingly, long-duration government bonds outperformed, but were matched in performance by high yield and floating rate bank loans, which benefited from tighter spreads compared to the previous weeks. Commodity indices largely showed gains, led by a sharp increase in energy, with the price of crude oil recovering by nearly 6% to just under $48/barrel driven by stronger U.S. economic data and further talk of OPEC supply reductions taking hold in 2019.