US equities hit record highs, as expectations for the US Iranian clash wanes
Markets continued to be dominated by the fallout of the killing of a senior Iranian military commander by the US this week, with equities selling off at the beginning of the week and haven assets rallying. However, following a missile strike by the Iranians on a US military base in Iraq, which resulted in no casualties, expectations for an escalation in the crisis waned, and US equities rose to record highs whilst haven assets sold off. Markets were also supported by expectations for phase one of the US China trade deal to be signed next week, on the 15th January.
As of 12pm London time on Friday, over the week US equities rose 1.2%, with technology stocks rising 2.0%. European equities rose 0.5%, whilst UK equities fell 0.5%, with more domestic mid cap stocks falling 2.1% as the focus increasingly turned away from the Conservatives convincing general election victory towards forthcoming EU Brexit negotiations, which are set to begin on the 1st March. Japanese equities rose 0.8% and Australian equities rose a massive 2.9%, benefitting from both the geopolitical relief rally and the strongest retail sales growth in two years. Emerging markets climbed 0.5%, with a large divergence of returns at country level.
Crude oil and gold rapidly give up mid-week gains
Brent crude oil, having momentarily spiked to $71.75 per barrel on news of the Iranian missile strike on the US military base in Iraq, quickly fell as markets downgraded the likelihood of a further escalation in the crisis. Brent crude is now trading at $65.4 per barrel, whilst US WTI (West Texas Intermediate) is trading at $59.8 a barrel. Similarly, gold rallied to $1,611.4 per ounce but has since fallen to $1,551. Should markets prove to be too prescient about the chances of further Iranian strikes, both oil and gold can be expected to rally sharply once more.
US Treasuries and the Japanese Yen also fall over the week
Developed market government bonds, which also rallied at the beginning of the week, gave back most of their returns and more by Friday. 10-year US Treasury yields are now trading at 1.85%, UK Gilts 0.80% and German Bunds minus 0.19%. The Japanese Yen, which also frequently trades as a safe asset, gave up all gains from midweek, finishing 1.4% lower versus the dollar by Friday.
US Service sector lead indicator exceeds expectations, in direct contrast to manufacturing
In economic news, which was somewhat overshadowed this week, the latest Institute for Supply Management (ISM) non-manufacturing index was released, which is widely regarded as a forward indicator to the health of the services sector. The index rose to 55 for December, with any number above 50 representing expansion. This was above expectations and in direct contrast to the previously released manufacturing ISM, which came in at 47.2, the weakest reading since the financial crisis of 2008/09. The sub-index of service business activity surged to 57.2, up from 51.6, helping to alleviate any concerns that the slowdown in manufacturing was impacting the wider US economy, with the service sector representing 2/3rds of US economic output. The latest employment figures are due to be released today, with the US non-farm payrolls forecast to show employers added 160,000 jobs in December.
Christmas spending gives Australian equities a lift
Following markets globally, the ease in geopolitical tensions helped propel Australian equities to their largest weekly increase since February 2018. All major sectors made gains over the week led by healthcare, remarkably higher by 6.5%. In particular, CSL, Australia’s largest listed health company, hit record highs, up 2.8% on Friday alone after reports of an early start to the flu season in North America, prompting demand for its flu vaccine unit. Materials were the only notable laggard this week. Although finishing the week in positive territory, up 1.6%, the fall in iron ore prices overnight weighed on miners including BHP Group, down 0.3%, whilst Fortescue Metals fell 1.1% on Friday.
In economic news, there was some good news for retailers as November retail sales lifted 0.9%, the best rise in two years, and easily beat the expected growth rate of 0.4%. This was put down to early Christmas spending promotions such as Black Friday.