Investors Feeling Optimistic as Trade Negotiations Continue
There was further evidence last week that the U.S. economy slowed toward the end of last year and into the start of this one. Non-defense capital goods orders ex-aircraft, a proxy for business investment, fell sharply for the second straight month in December, despite forecasts of a modest gain. And both existing home sales and leading indicators fell in January, while the flash manufacturing report for February weakened slightly, although that was more than offset by a rise in the services report.
That same manufacturing report for the Eurozone showed the sector falling into contraction in February for the first time since 2013, led by weakness in Germany, which barely managed to avoid recession by delivering 0.0 percent growth in the fourth quarter. The important motor vehicle industry has slowed and must still deal with the lingering threat of U.S. tariffs. According to United Nations data, motor vehicles were the largest category of German exports in 2017, accounting for 18 percent of the total dollar value.
Global Markets on the Rise as Investors Look Beyond Soft Data
But last week’s gains were not just confined to the U.S. Global markets also rose, as investors continued to look beyond the softer data in the belief that it represents a temporary slowdown and not something more ominous, as central banks have turned more dovish, China works to stimulate its economy, and a trade deal looks increasingly possible. The EuroStoxx 50 index of Eurozone equities climbed 0.9 percent last week and is up 7.5 percent year-to-date. In contrast, stocks in the UK fell for the first time in four weeks. The Nikkei rose 2.5 percent last week and is up 7.5 percent on the year. And the Shanghai Composite rose 4.5 percent last week, and another 5.6 percent overnight after this week’s tariff deadline was extended, to bring its gain on the year to 18.7 percent.
This year’s rise in stocks has been mirrored in other assets as well. Brent crude oil is up 24 percent since the start of the year, and copper is up nine percent. Credit spreads have narrowed, and the VIX has fallen. The dollar has stabilized, and Emerging Market currencies have firmed. The only thing missing is evidence of improvement in the data.
Is the Economy Slowing? We’ll Know More in the Week Ahead
The flow of economic data picks up in the week ahead. Scheduled reports include fourth quarter GDP, forecast by the Bloomberg consensus to have grown by 2.4 percent, down from 3.4 percent in the third quarter. ISM reports for February are scheduled, as are consumer confidence and some lagging pricing and housing data. Overseas, February PMI data for China and the UK are scheduled. The leaders of the U.S. and North Korea are expected to meet this week as well, and Fed Chairman Powell testifies before Congress.
Of course, the first order of business remains the trade dispute between the U.S. and China. The deadline extension would certainly suggest that progress is being made, but the participants are quick to point out that significant differences remain. What that implies for the chances of a meaningful agreement is unclear, although markets seem quite confident that a deal is coming.
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Past performance is not a guarantee of future results.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector
indexes, from which members are ranked by size and placed on a selection list.
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.
Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
The FTSE All-Share Index represents the performance of all eligible companies listed on the London Stock Exchange's (LSE) main market, which pass screening for size and liquidity. The index captures 98% of the UK's market capitalisation.
The Eurozone Manufacturing Purchasing Managers’ Index (PMI) is a weighted indicator calculated from indices of output, new orders, employment, suppliers’ delivery times and stocks of purchases.
The Purchasing Managers’ Index™ (PMI™) is a composite index based on five of the individual indexes with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers’ Delivery Times - 0.15, Stock of Items Purchased - 0.1, with the Delivery Times index inverted so that it moves in a comparable direction.
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