In the wake of the signing of the US China phase one trade deal, a positive start to the US fourth quarter earnings season and improving growth figures released by China on Friday, helped markets to continue their rally into 2020. Meanwhile, tensions over the confrontation between the US and Iran ebbed away, as Tehran finally admitted responsibility for the accidental shooting down of a Ukrainian International Airlines passenger jet, killing all 176 passengers and crew on board.
Equities continue their strong start to the year…
As of 12pm London time on Friday, US equities rose by 1.6% over the week, with technology stocks climbing 1.9%. European equities rose 1.2% and UK equities 1.3%, with more domestically focused mid cap stocks rising 1.5%. Australian equities increased by 2.0%, Emerging Markets by 0.6%, whilst domestic Chinese equities fell 0.5% as the details of the US China trade detail disappointed, and Japan suffered too as a large exporting nation, remaining flat for the week. However, Brazil, India and South Korea all generated strong returns, climbing 1.0%, 0.8% and 2.0% respectively.
Whilst bond markets remain solid as inflation remains moribund
Despite the exuberance in equity markets, bond markets remained remarkably well behaved, with developed market government bond yields falling if anything, at odds with rising expectations of improving economic growth. This was largely due to the latest US inflation print coming in at 2.3% for core CPI (Consumer Price Inflation), but with the Fed’s preferred measure, the Core PCE (Personal Consumption Expenditures), still only at 1.6%, well below the 2% target and supporting the Federal Reserve’s case for keeping rates unchanged in 2020. 10-year US Treasuries are currently yielding 1.81% and German Bunds minus 0.22%. UK Gilt yields fell over the week, with yields moving inversely to price, on the back of weak inflation reported for the month of December, coming in at 1.3%, the lowest rate since November 2016. This increased expectations for a January interest rate cut, putting pressure on Sterling. However, the general election in the final quarter of last year negatively impacted sentiment, and policy makers will be looking keenly at forward looking indicators, PMI Indices (Purchasing Manager Indices), released on the 24th January before making a decision.
Content of US China phase one trade deal disappoints
Arguably the contents of the US China trade deal were largely a disappointment, with most US tariffs on Chinese goods staying in place, but a further escalation in the trade war being avoided. The US will monitor China’s adherence to the agreement, with the carrot of rolling back tariffs in ten months’ time if they have been compliant. Equally, the enforcement mechanism allows for further tariffs to be applied if the terms of the agreement have been violated. In the immediate term, the economic impact of the agreement is expected to have minimal impact.
Fourth quarter US earnings season starts positively
Of the big US investment banks, JP Morgan Chase began the reporting season by revealing net income had increased by 12% year on year, far better than estimates, with trading volumes in the final three months of last year having materially boosted earnings. Citigroup and Morgan Stanley also reported strong earnings figures, whilst Goldman Sachs disappointed, largely due to a surge in litigation charges relating to the Malaysian 1MDB scandal. Bank of America disappointed too with relatively weak earnings.
It was not just US banks that impressed markets, with Delta Airlines benefitting from strong demand during the Christmas holiday season. The share price of Tesla, the car manufacturer, edged past $500 for the first time this week, giving the company a market capitalisation (cap) of $91.8bn. This is greater than the combined market cap of General Motors and Ford combined, despite only having a sales volume equivalent to 3% of the two giant manufacturers!
Alphabet, parent company of Google, became the next US company to cross the $1trn market cap level, joining Apple, Amazon and Microsoft, as enthusiasm for technology continued.
Investors put aside political uncertainties in the search for additional yield
In another sign of investor optimism this week, Italy became the latest eurozone country to attract a record order book for its debt, as investors look for any debt offering a higher yield than German bunds, of which much still trades below zero. Italy attracted €44bn of bids for its new 30-year bond; this followed €53bn of orders for Spain’s 10-year bond, and Belgium, Cyprus and Ireland all attracted strong interest in their new bond issues.
Australian equities record their strongest start to a year since 1994
The Australian market continued its good start to the year, now recording its most impressive start to the year since 1994, up 5.7% year to date. Australian market sentiment was helped in particularly from the signing of the Phase One deal between the US and China, Australia’s largest trading partner, with all sectors broadly improving.
But it was the mining and materials sector which were the best performers at the end of the week, helped by a boost in iron ore prices. The sector finished up 2.8% for the week, with BHP Group rising 1.2%, while Rio Tinto climbed 1.8% to a six-month peak, despite a drop in output in recent months due to weather related issues.
Chinese growth data reassures markets
On Friday, China released its latest economic growth figures, reassuring investors over the health of the world’s second largest economy. While annual GDP growth had grown at its slowest pace since 1990 at 6.1%, growth in the final month of 2019 had picked up, providing improving momentum into 2020.