Thursday, 14 November 2019

Global equity markets were mixed this week as investors reacted to comments from the Federal Reserve as well as renewed uncertainty regarding a U.S.-China trade deal. Defensive sectors outperformed following the U.S. administration’s threat to raise tariffs on Chinese goods should their trade terms not be met.   

Stocks

Officials have previously suggested that the signing of a “phase one” trade deal would prevent the implementation of tariffs scheduled for December 15th. Cyclical stocks would likely be hit the hardest should the tariffs be imposed so close to the Christmas holiday. Third quarter earnings season is wrapping up with over 90% of S&P 500 companies having reported thus far according to FactSet. Additionally, 75% of companies which have reported have posted earnings above consensus estimates, above the five-year average. Year-over-year earnings growth for the quarter has improved steadily since the start of the season, although it is currently expected to end at -2.4%, marking the worst decline since the second quarter of 2016. Walmart, Inc. topped earnings estimates due to better than expected comparable stores sales growth and strong e-commerce sales, with the company slightly raising its full year guidance. Cisco Systems shares dropped over 5% despite beating estimates on both their top and bottom lines as the company cut its current quarterly guidance in anticipation of a drop in revenues. Disney shares spiked as the company rolled out its Disney+ streaming services and reported 10 million subscribers, a figure that WarnerMedia’s HBO streaming service took approximately four years to reach. 

Bonds

Following the Fed’s comments in regards to the economy and interest rates, investors sought haven assets, causing yields on U.S. Treasuries to fall. The yield on the benchmark 10-year Treasury note fell to 1.82% and the yield on the 2-year Treasury note fell to 1.59%. 

Economy

Fed Chairman Jerome Powell testified before the Congressional Joint Economic Committee and the House Budget Committee this week, keeping on theme with his remarks from the October FOMC meeting announcement that rates are on hold going forward until new data suggests deterioration or overheating of economic conditions. The risks the Fed continues to observe are trade issues, weakness in global growth, and “muted” inflationary pressures. Household consumption remains a bright spot in Powell’s comments, although he once again highlighted faltering business investment, likely in response to global economic and trade concerns. Headline CPI was expected to be unchanged, but managed to rise to an annualized 1.8%. However, the core reading, which excludes more volatile food and energy prices, fell 0.1% to 2.3% due to weakness in wireless services and apparel. The price of WTI crude fell due to a modest inventory buildup of 2.2 million barrels and a rise in daily production volume. October retail sales were mixed, with the headline reading topping estimates at 0.3% but with core readings falling short due to negative growth for restaurants, electronics, and clothing. 

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