In focus - Economics
Monthly markets review - January 2019
A look back on markets in January, when equities received a lift from signals that the US Federal Reserve would be more patient with interest rate increases.
6 February 2019
- Global equities gained in January. Economic data continued to moderate but optimism that US-China trade relations could improve and dovish messaging from the Federal Reserve (Fed) lifted shares.
- US equities were stronger. The Fed highlighted a greater degree of flexibility in future rate decisions and confirmed any changes will be based on economic momentum.
- Eurozone equities bounced back, supported by an improving picture on global trade. Data showed Italy has slipped into recession.
- UK equities performed well but lagged global equities as a result of sterling strength on hopes that the UK would avoid a disorderly exit from the European Union.
- Japanese equities gained and the yen also strengthened against the US dollar.
- Emerging markets (EM) equities rallied on the Fed’s more cautious tone. The US dollar depreciated, further supporting EM returns.
- Global government bond yields fell in January (i.e. prices rose). Corporate bonds saw a strong rebound and outperformed government bonds.
Please note any past performance mentioned in this document is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
US equities gained ground in January to recover a substantial part of the sharp falls seen in December. Although the Fed left its headline policy rate unchanged, it highlighted a greater degree of flexibility in future rate decisions, confirming any changes will be based on economic momentum. Previously, it had said that gradual increases in the policy rate would be needed. Additionally, President Trump stated that he would meet with China’s President Xi Jinping in February to work towards a resolution to the trade dispute. The developments buoyed risk assets around the world.
The Fed granted itself the additional flexibility due to US economic data which, while still broadly stable, show signs of weaker momentum and “muted inflation pressures”. Labour market strength continued into the new year, with 304,000 non-farm payroll jobs added in January versus expectations of 165,000 (data released in early February). However, average earnings growth (year-on-year) cooled very slightly from 3.3% to 3.2% and headline inflation in December dipped.
Furthermore, while the Q4 earnings season has thus far shown more positive surprises than negative, there have been cautious notes in the results of several prominent market names, referencing global economic headwinds. Industrial bellwether Caterpillar issued more conservative guidance, while comments from Amazon and Apple also warned of more difficult trading conditions.
All areas of the S&P 500 were higher over the month, but stocks in the industrial and energy sectors were amongst the strongest performers. The more traditionally defensive consumer staples, utilities and healthcare sectors generated positive returns that failed to match the gains made elsewhere.
Eurozone equities bounced back in January after a weak end to 2018. The MSCI EMU index returned 6.3% in January. All sectors registered positive returns except for the safe haven communication services, which had performed well in December. In particular, some of the more economically-sensitive sectors such as automotive and semiconductors notched up strong returns. This was in part due to improving news flow on trade. Talks continued between the US and China, while the EU unveiled proposals for a zero-tariff trade deal with the US on industrial goods, including cars.
Economic data pointed to ongoing weakness in the eurozone. GDP figures showed growth of 0.2% quarter-on-quarter in Q4, the same as in Q3. Italy slipped into recession with two consecutive quarters of economic contraction. In terms of forward-looking indicators, the flash composite purchasing managers’ index fell to 50.7 in January, a 66-month low and compared to 51.1 in December, suggesting that business growth is close to stalling. The unemployment rate remained stable in December at 7.9%; this remains the lowest rate since October 2008.
The European Central Bank (ECB) said the risks surrounding the eurozone growth outlook have moved to the downside. The ECB maintained its guidance for interest rates to remain unchanged “at least through the summer of 2019”.
UK equities performed well over the month, rising 4.2% (FTSE All-Share), although lagged global equities as the market’s significant defensive constituency trailed with the return of risk appetite. Sterling strength was another headwind which held back the more internationally focused FTSE 100, which rose by 3.6%.
The weaker performance compared to global equities was partly a function of the UK large caps having outperformed at the end of 2018. That was when fears around the outlook for the global economy, future path of US monetary policy and political uncertainty reached a head. Sterling bounced back in January as hopes built the UK would avoid a “no deal” Brexit.
Many domestically focused sectors also bounced back from very depressed levels. Just prior to the period under review pessimism towards UK equities once again increased, and this weighed on UK-centric areas of the market. However, easing “no deal” Brexit fears, combined with reassuring trading updates, drove a powerful rebound in the FTSE 250 (ex Investment Trusts) index, which rallied 7.6%.
UK retailers published reassuring Christmas updates with some of the best performers reporting mid to high single-digit like-for-like sales growth over the festive period. Meanwhile, trading at some other names which have been worst affected by the changes on the UK high street did not appear to have deteriorated further.
After the sharp falls seen in December, the Japanese market rose steadily throughout January to end the month 4.9% higher. This was despite the extraordinary intra-day volatility in global currency markets, which occurred in the first few days of the year when the Japanese equity markets remained closed for New Year public holidays. The yen appreciated sharply against all currencies on 2 and 3 January before gradually retracing most of the move to end just 0.7% stronger against the US dollar for the month as a whole.
The corporate results season for the September to December quarter began towards the end of January. Although the majority of companies are reporting numbers in line with expectations, initial indications are for slightly more negative surprises than positive.
During January, concerns over the prospects for a sharper slowdown or global recession have eased somewhat, aided by comments from the US central bank. The market was led upwards by a broad range of cyclical or economically-sensitive areas, which had arguably been oversold in the sharp market sell-off in late 2018. Glass, paper, machinery, real estate and shipping stocks rose most strongly, while more defensive areas such as railways and foods underperformed. The retail sector declined during the month.
There were no surprises in Japan’s economic data released in January, but the Bank of Japan did revise down its own forecasts for growth and inflation over next year. This was largely viewed as moving into line with reality, rather than sending any particular negative message.
Asia (ex Japan)
Asia ex Japan equities rebounded in January amid growing optimism that the trade standoff between the US and China would be resolved. Concerns over China’s deepening economic slowdown limited gains, however. Chinese exports declined 4.4% year-on-year in December, the biggest monthly fall in two years. Imports dropped 7.6%, while the manufacturing sector also contracted. Fourth quarter GDP growth eased to 6.4% year-on-year, dragging 2018 growth to 6.6%, the lowest since 1990. The People’s Bank of China announced another cut to banks’ reserve requirement ratios in its latest effort to promote lending and shore up growth. The government also outlined higher public spending and tax cuts for businesses.
In this environment, all markets closed higher except India, where the rupee weakened on growing fiscal concerns. Chinese and South Korean stocks posted double-digit gains. Hong Kong equities also fared well. By contrast, Taiwan underperformed as the outlook for the country’s technology heavyweights dimmed amid slowing global smartphone demand.
Within ASEAN, Thailand recorded the strongest gains, helped in part by clarity on the election front; the country will hold general elections on 24 March, the first since the military coup in 2014. Elsewhere, markets in the Philippines and Indonesia continued to outperform, while Singapore and Malaysia lagged.
Emerging markets (EM) equities advanced as the US Fed left rates unchanged as expected, but sounded a more dovish tone at its first meeting of 2019. This surprised markets; risk assets rallied and the US dollar weakened. EM equities rallied with the weaker dollar lending support. Turkey, Brazil and Russia were particularly strong. China also outperformed. India bucked the firmer trend and fell. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World.
Turkish stocks, particularly financials, traded up as overseas investors returned in their search for higher yield. The Turkish central bank maintained its key interest rate at 24%, supporting its inflation-fighting credibility. In Brazil, optimism that the new administration will deliver on its pro-business pledges, including spending cuts and the sale of state-controlled companies, continued to underpin gains.
A rebound in the oil price, as OPEC+ production cuts took effect and Venezuelan sanctions kicked-in, helped oil exporters including Russia and Colombia. China was buoyed by hopes for a conciliatory outcome from trade talks with the US.
India was the exception, among EM, returning a loss amid the oil price rebound (India is a net oil importer) and an expansionary budget, by the ruling Bharatiya Janata Party, ahead of national elections in May. Investors had been hoping for more fiscal discipline.
Global government bond yields fell in January (i.e. prices rose), even as higher risk assets rallied as the US Fed surprised markets with a clear dovish shift and there was further moderation in economic data in Europe and China. European government yields produced larger moves than the US as economic activity remained subdued. Peripheral Europe outperformed core markets, supported by a cautious tone from ECB President Mario Draghi as he acknowledged downside risks to the economy. Italian and Spanish 10-year yields each declined by around 20 basis points (bps), while French yields also declined markedly.
Riskier assets rebounded sharply in January, following the significant drawdown and marked deterioration in sentiment in the latter stages of 2018. Corporate bonds produced a strong rally and outperformed government bonds with spreads narrowing significantly. The rally in credit was especially forceful in high yield (HY), particularly in the US dollar market, which had been hit hard in the fourth quarter, reversing nearly all of the substantial spread widening seen in December. The energy and insurance sectors recovered ground, while the automotive sector remained under pressure.
Emerging market bonds had a strong month across the board with HY US dollar denominated and local currency bonds performing particularly well.
2019 started with significant gains for global equity markets with the MSCI World index returning 7.8% in January. Convertible bonds benefitted from this tailwind and the Thomson Reuters Global Focus index was up 3.9%, implying a participation rate of 50% in the upside. Convertible bond valuations remained mainly unchanged with US paper becoming slightly more expensive. The vast majority of convertibles are fairly priced.
The S&P GSCI Spot Index rose in January driven by the rebound in the oil price. The energy component as a whole was down as the natural gas price moved slightly lower. The industrial metals component was firmer with nickel prices particularly robust amid concerns that Brazilian producer Vale could cut some supply. Soft commodities rose led by gains in sugar and soybeans. Precious metals were also slightly higher.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
 The eurozone purchasing managers’ index is produced by IHS Markit and based on survey data from around 5,000 companies based in the euro area manufacturing and service sectors. A reading above 50 indicates expansion.
 Investment grade bonds are the highest quality bonds as determined by a credit ratings agency. High yield bonds are more speculative, with a credit rating below investment grade.
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