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Market commentary for week ending 2018-11-11

The U.S. midterm elections dominated the headlines for most of the week. The election outcome was largely expected. Legislative power is balanced, each political party controlling one-half of the houses in Congress. The Republicans secured the control of the Senate and Democrats won the majority control of the House. In fact, Republicans gained better results than expected. Generally, this outcome should have limited consequences for the financial markets. However, further deficit spending will find hard times to be passed.


As expected, FED leaves the rates unchanged. Central bankers gave the speech and their assessment of the current state of the economy which was largely positive. “Labour market has continued to strengthen and the economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months and the unemployment rate has declined. Household spending continued to grow strongly.” This leaves us with a high probability of a rate hike coming on the next meeting in December. This would be the fourth one this year. On a historical standard, the current rate of 2.25% is still very low, however, the velocity of change has been high. Given the economic growth, businesses still maintain their borrowing costs low.


The market is focusing on US-China trade deals and the possibility of resuming the talks. This news positively influenced marked rebound last week. For China, it is very important to find a common ground in the talks. The latest manufacturing PMI data hovering only slightly above 50, translating numbers into words, no growth. This may be a suggestion that China may be slowing much stronger than expected. President Xi Jinping also expressed concerns regarding the slowdown.


During October, equities had a 10% correction which was a rather sharp decline. Lack of a catalyst reduced the certainty of the future moves for the market participants. Looking back on the strong sell-offs, we do not have to travel too far. Similar set up has occurred even this year in February when markets corrected sharply from the top. Markets participants attributed those volatility events to deleveraging, caused by technical traders. The US large-cap index S&P 500 currently sits 5.5% below the market top. Stocks finished higher for the week. Last week gains were over 2%, with the healthcare sector as a leader, gaining slightly over 4% on the week. On the other hand, the communication services sector was the worst, loosing over 1% on the week. We have heard many positive corporate earnings announcements regarding the reporting season. Overall, more than 75% of companies have beaten expectations.


With VIX currently sitting on mid 17, market volatility may be persisting.  Valuations are currently on average levels. The market sell-off brought the price to earnings ration at 16.4. Corporate earnings are expected to rise again in 2019. Many analysts believe that growth and fundamentals are positive, therefore in their opinion, we are going to see new all-time highs.


In the commodity world, WTI crude oil remains the negative outlier. Crude has fallen over 21% from the top.


European markets also reacted positively to the governmental development in the US. Higher than expected growth in the industrial production supported rebound in the asset prices. The earnings results have been mixed throughout the sectors. The automotive sector was a disappointment, mainly due to the lower production volumes. On the other hand consumer discretionary, especially luxury brands gained due to the strong sales figures from Asia.


Next week we can expect German ZEW data on Tuesday, inflation data on Wednesday, retail sales on Thursday. Central bankers are expected to have speeches next week. Reporting season is coming slowly coming to the end.


November 12, 2018 - jd_admin