Pictet North America Advisors

2020 Weekly Views — January 13

Pictet North America Advisors 2020 Weekly Views — January 13
Pictet North America Advisors

2020 Weekly Views — January 13

Pictet North America Advisors 2020 Weekly Views — January 13

Market update

Resilient market

The S&P 500 closed the week at 3,265.35 or +0.94% higher. The Dow Jones closed at 28,823.77 or +0.66%, and the Nasdaq rallied +1.75%. The volatility index VIX closed the week at 12.56 from 14.02 a week before with a weekly high of 16.39. Hardware and Software companies outperformed. In Europe, Euro Stoxx 600 rallied -0.19%. Tech was the best performer.

The 10-year UST closed at 1.82% from 1.79% a week before. The yield curve moved up and slightly steepened. US Corporate Bond spreads: Investment Grade widened 2bps to 129bps; High Yield tightened 3bps to 415bps. German 10-year Bunds yield closed at -0.19% compared to -0.28% a week ago. European Corporate Investment Grade spreads widened 1bp to 105bps, and High Yield spreads widened 4bps to 354bps.

The US Dollar Index (DXY) appreciated +0.53% during the week and closed at 97.35. The Euro closed at 1.1120 (-0.36% weekly); the Japanese Yen at 109.45 (+1.26% weekly) and the Swiss Franc at 0.9727 (-0.02% weekly). Gold closed at 1,562.29, appreciating +0.65%. Oil ended the week lower: Brent closed at 65.10 (-5.10%) and WTI at 59.12 (-6.23%).

Macroeconomy

Middle East tensions
There was a notable risk-off move in global markets on Tuesday following Iran missiles fired at two US military bases and Iran’s announcement that it would no longer abide by the 2015 nuclear deal: the S&P 500 was down by -1.7%, 10-year UST rallied by 10bps towards 1.70%, Brent reached a high at 71.75, Gold broke 1,600 and the Japanese Yen rallied to 107.65. Sentiment rebounded quickly as there were no US casualties, Iranian Foreign Minister Mohammad Javad Zarif tweeted that the government “does not seek escalation or war”, and Trump also tweeted that “All is well!”. Separately, Iran admitted that its military accidentally shot down an Ukrainian jetliner last week, which led to protests around the country - some violent.

Trade developments
The Chinese trade delegation, led by Vice Premier Liu, is set to travel to the US from Jan. 13 to 16 for the signing of the phase one agreement. So far, both parties have announced that China would increase its purchases of US farm goods and other products, further open its financial sector, pledge not to devalue the Chinese yuan to help the country’s exporters and better protect American intellectual property. In exchange, the Trump administration cancelled new tariffs on roughly $156bn of Chinese imports that were set to take effect Dec. 15. It also agreed to cut in half the existing 15% tariff rate on roughly $120bn of Chinese goods imposed on September. The US Treasury Department is proposing to revive bi-annual talks on the economic relationship between the two countries, which President Trump had stopped at the start of his presidency.

US Economic data
The Friday non-farm payrolls for December came in at +145k, below consensus for +160k and after a strong November revised down to +256k. Unemployment rate stayed the same at 3.5%, and earnings were slightly lower than expected at 2.9% y-o-y (vs. estimates at 3.1% and prior 3.1%) and 0.1% m-o-m (vs. estimates at 0.3% and prior 0.2%). Fed Vice-Chairman Richard Clarida said that “policy is in a good place” and will respond to “material changes”. He also said that “global disinflationary forces are powerful” and that policy must take that into account.

Global Economic data
Business activity in the Euro Zone firmed slightly more than expected in December, as gains in the service sector partially offset another decline in manufacturing. The PMI inched up to 50.9 from 50.6 in November. In Germany, the November manufacturing orders fell by -1.3% m-o-m and exports declined by -2.3% m-o-m. Industrial production rebounded by +1.1% in November after two months of decline. In China, the consumer price inflation (CPI) in December came in at 4.5% y-o-y, below the consensus expectations of 4.7%. Food inflation slowed, reflecting the first decline in seven months.

Highlights

Earnings season
The Q4 Earnings season is set to kick-off this week with US Banks such as JP Morgan, Wells Fargo, Bank of America, Goldman Sachs and Morgan Stanley among others. Earnings revisions across geographies were negative almost all through 2019, however earnings revisions for most markets have been trending higher for 2020. In line with this, the consensus is expecting Q4 earnings to decrease by -4.7%, a larger decline than the five-year average (-3.3%).

British Pound
GBP has depreciated below 1.30 from 1.3285 levels after the first meeting between Ursula von der Leyen, the new president of the EU Commission, and Boris Johnson. Von der Leyen reiterated that there isn’t time for detailed negotiations on all aspects of the UK’s future relationship with the EU, while Boris Johnson stressed that the U.K. won't extend its transition period beyond 2020, and that he wants a Canada-style trade accord - 98% of goods traded are free of tariffs. Also, Bank of England’s Governor Mark Carney suggested that there may be a need to do more to secure the economy.

What to watch

Monday: UK GDP (Nov.); US Budget Statement (Dec.)

Tuesday: US NFIB Small Business Optimism (Dec.); US CPI (Dec.); China Trade balance (Dec.)

Wednesday: Germany GDP (2019); UK CPI & PPI (Dec.); Eurozone Industrial Production (Nov.); US Empire manufacturing (Jan.); US PPI (Dec.)

Thursday: Eurozone EU27 New Car Registrations (Dec.); US Retail sales (Dec.); US Import prices (Dec.); Philadelphia Fed business outlook (Jan.)

Friday: Eurozone CPI (Dec.); UK Retail sales (Dec.); US Housing starts (Dec.); US Industrial Production (Dec.); University of Michigan survey; China Industrial Production (Dec.); China Retails sales (Dec.); China GDP (Q4);

Investment team ― Pictet North America Advisors