Investors Search for Progress on Key Issues
Investors are hoping for any evidence of a breakthrough on trade but have been buffeted recently by conflicting reports that have only added to the confusion. Tough talk from presidential advisor Peter Navarro was followed by a rebuke from economic advisor Larry Kudlow. That was followed by rumors that trade representative Robert Lighthizer told a group of corporate executives that the tariff hike scheduled to take effect at the start of the year has been put on hold, which he quickly denied. And over the weekend, there was apparently little common ground on trade expressed by Vice President Pence and Chinese President Xi at the APEC Summit in Papua New Guinea, resulting in a failure among the 21 nations in attendance to issue a concluding joint statement.
That leaves investors to now focus on the G 20 meeting in Buenos Aires at the end of the month. Negotiations are apparently ongoing, and Trump and Xi are reportedly scheduled to meet for dinner after the meeting concludes. Coming after the midterm election, the G 20 meeting has long been identified as a possible venue for some sort of breakthrough in the ongoing standoff. It is unlikely that the two sides will resolve the major issues at the heart of the dispute, but any signs of progress, including a so-called “cease fire” of the kind denied last week by Lighthizer would be viewed as encouraging by investors.
Investors Closely Monitoring Trade Tensions and The Fed
The impact of trade on economic growth has seemingly supplanted questions about the pace of earnings growth and Fed rate hikes as the primary concern among investors, although it is impossible to separate these issues. Growth was in the spotlight last week after both Germany and Japan posted economic declines in the third quarter. Both were suppressed by what are likely transitory influences, including natural disasters in Japan and changes to automobile emission standards in Germany. Both economies are expected to rebound in the fourth quarter, but trade was nevertheless cited as a negative factor in the quarter.
Bond yields also retreated on rising growth concerns. The ten-year U.S. Treasury note yield plunged 12 basis points to 3.06 percent in the Veteran’s Day shortened trading week, its lowest level since October 2, the day before Fed Chairman Powell spooked markets by saying the Fed funds rate was a long way from neutral. The two-year note yield fell by a similar amount. Credit spreads resumed their widening as well. After two straight weeks of modest contraction, the spread between the Bank of America Merrill Lynch High Yield index and the ten-year note surged by 47 basis points to 418, its widest in two years. Those same growth concerns contributed to a modest decline in the odds for a fourth rate hike by the Fed this year in December, although that remains the overwhelming expectation at a 72 percent likelihood. Lowered expectations of a further rate hike in March were more pronounced, however, declining to 37 percent from 51 percent the prior week, according to the CME FedWatch tool.
Corporate Earnings Growth Poised to Slow; Brexit Creates Uncertainty
Expectations for corporate earnings growth also continued to edge lower. According to Factset, earnings in the fourth quarter are now expected to grow by 13.9 percent, down from 16.6 percent at the start of the quarter. And 2019 growth is now pegged at 9 percent, down from 10.3 percent at the start of the quarter.
Contributing to the overall uncertainty is the status of the Brexit deal proposed by British Prime Minister Theresa May. What happens next, and whether her government survives, remains in doubt.
All of which leaves investors in a state of heightened risk aversion that is likely to persist until there is evidence of constructive progress on these issues.
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