Global markets took a breather this week as they digested events overseas, key economic data reports and a cut in 2019 global growth forecasts. Many of the major global indexes were down for five straight days, marking a three-week low after a strong start to the year. In the U.S., small cap stocks and sectors like energy and industrials that lead 2019’s rally as well as health care, fared worse than the broader market. Internationally, China, Europe, and Japan were particularly hit hard over the last two days following the developments out of the ECB meeting and weak export data from China. The U.S. dollar continued its surge and some of the typical safe havens like utility stocks, metals, and bonds held in well posting positive gains for the week.
S&P 500: 2743 (-2.16%)
FTSE All-World ex-US (VEU): (-1.90%)
US 10 Year Treasury Yield: 2.62% (-.14)
Gold: $1,298.11 (0.38%)
EUR/USD: 1.1243 (-1.18%)
- Monday – China cut their growth estimates for 2019 to a range of 6% – 6.5% citing impacts of trade tension among one of the factors.
- Tuesday – Several large European banks were indicted in a multibillion-dollar money laundering scandal centered around dirty Russian money.
- Wednesday – The OECD cut global growth forecasts for 2019 from 3.5% to 3.3%.
- Wednesday – The U.S. trade deficit hit a 10-year high in 2018 widening to $621 billion.
- Thursday – Paul Manafort, the former Trump campaign chairman, was sentence to 47 months in prison for tax and bank fraud despite the prosecution’s recommendation of 19-24 years.
- Friday –Norway’s sovereign wealth fund, which is $1 trillion in size and the largest in the world, announced plans to drop oil production and exploration companies from its fund.
- Friday – Mixed economic data reports showed that U.S. job gains dropped to 20,000 in February, well below expectations, while wage growth came in strong above expectations.
The week started on an optimistic note with trade negotiations looking like the U.S. and China were close to a deal, but the mood quickly soured as concerns over global growth took over. The European Central Bank (ECB) met this week and announced new stimulus plans citing continued softness in the European economy. Europe has been one of the weaker spots of the global economy, grabbling with trade tensions and geopolitical worries, so a dovish tone was expected. However, the surprise move to not begin rate hikes for at least another year verses late Q3 and the announcement of a third round of cheap loans for banks (called targeted long-term refinancing operations or TLTRO) sparked concern the currents risks are weighted much more to the downside. In addition, the ECB also slashed GDP forecasts to 1.1% from 1.7% and signaled stubbornly low inflation is expected to continue. The biggest worry for Europe is that revised estimates are still too high and that more European countries will fall into a recession, like Italy already has. It is also worth noting BREXIT negotiations with the European Union are still far from resolved.
The bottom line is that there is a clear divergence between the U.S. and other economies globally. The global economy is currently vulnerable and that is why we are seeing central banks soften their tone. Earnings season has now wrapped up for Q4 showing 13% earnings growth and 70% of U.S. companies beating earnings estimates, but forward guidance is lower. The markets appear to have already largely priced in some sort of trade deal being reached between the U.S. and China. The weak export data out of China and a cut in China’s growth outlook show that pressures are mounting. With the U.S. presidential election on the horizon and some mixed economic data coming in at home, it is clear that a resolution must be reached for both parties soon. Despite an influx of negative news this week, the market has been on a tear, so a breather was likely warranted.