Friday, 23rd of November 2018
It is November, Friday, and Thanksgiving, with its usual Black Friday frenzy for shoppers and companies alike… well, if we look at markets, there was more to be not so thankful for in the past few weeks…. Between Brexit angst, US-China trade war saga, Fed interest rates increases, there was plenty to chew this week. However, coming in this Friday, things do not look so bad.
Yesterday, Theresa May got her Brexit deal a bit sooner than many were expecting. EU President Donald Tusk and Commission President Jean-Claude Juncker declared on Thursday that a deal had been “agreed in principle at political level,” just as Commission negotiators circulated a text, which quickly leaked. The WSJ reported that the draft, which leaves open a range of future economic arrangements, comes about a week after the EU and U.K. reached a so-called withdrawal agreement, a legally binding document that spells out critical terms for Britain’s planned exit from the bloc next March. EU leaders are expected to sign off on Thursday’s text and the withdrawal agreement at a special summit in Brussels on Sunday, in what would be the culmination of 18 months of negotiations.The British pound jumped on the news, trading 0.8% higher on the day against the dollar. The deal still faces a tall hurdle in the U.K., where Mrs. May faces an uphill battle to win parliamentary backing for a plan that would keep the U.K. in the EU’s economic orbit for several years. “The British people want this to be settled. They want a good deal that sets us on course for a brighter future. That deal is within our grasp, and I am determined to deliver it,” Mrs. May said.
Selling the deal to British Parliament will be a challenge. Opposition Labour leader Jeremy Corbyn called the political declaration “26 pages of waffle” and urged lawmakers to vote down the deal. A series of lawmakers stood in the House of Commons Thursday to criticize both the terms of the U.K.’s departure and the vague wording of the future agreement. “This deal gives even more away,” than the withdrawal agreement, said former U.K. Brexit Secretary Dominic Raab.
Last week’s withdrawal agreement lays out the terms of the U.K.’s departure: the billions of euros London will pay to settle budget commitments; the status of EU citizens living in the U.K. and vice versa; and arrangements to avoid a hard border on the island of Ireland. The latter issue will likely entail continuing membership of the U.K. in the EU’s customs union for an indefinite period.
Next week will bring about the much awaited G20 meeting in Argentina. U.S. President Donald Trump and Chinese leader Xi Jinping have indicated they’re both ready for it. The world’s biggest economies have been engaged in an escalating trade war that is starting to have a greater impact on financial markets and global growth. On Thursday, Trump told reporters that China wants to make a deal “very badly” after his administration placed tariffs on about $200 billion worth of Chinese goods. China has also been sending more conciliatory messages. The Vice Minister of Commerce Wang Shouwen said Friday in Beijing that China hopes to meet the U.S. halfway in addressing trade issues. “Chinese and U.S. trade teams have been in close touch,” he said, echoing White House economic adviser Larry Kudlow’s comments last week that they have resumed contact “at all levels.” The Chinese official appeared to echo Trump’s line: “We noticed that the U.S. wants to reach an agreement to solve trade frictions with China. China hopes to work with the U.S. to contain disputes.” U.S. trade action hurts China, America and the world, he added. We will see if they can agree, but the odds are for a “certain” deal to happen, as both leaders need it, and they do not want to let their economies and stock market crumble. Let’s hope that common sense will prevail!
The meltdown that started in October in financial markets has not spared the crypto currency world. Indeed, Bitcoin sank toward $4,000 and most of its peers tumbled on Friday, extending the Bloomberg Galaxy Crypto Index’s weekly decline to 25 percent. That’s the worst five-day stretch since crypto-mania peaked in early January. Bloomberg reported that, after an epic rally last year that exceeded many of history’s most notorious bubbles, crypto-currencies have become mired in a nearly $700 billion rout that shows few signs of abating. Many of the concerns that sparked the 2018 slump have only intensified this week. “There’s still a lot of people in this game,” Innes, head of trading for Asia Pacific at Oanda, said. If Bitcoin “collapses, if we start to see a run down toward $3,000, this thing is going to be a monster. People will be running for the exits.” Bitcoin now trades around $4’300. The market value of all crypto-currencies tracked by CoinMarketCap.com sank to $138 billion, down from about $835 billion at the market peak in January.
As for US stock market valuations, the price-to-earnings multiple of the S&P 500 Index, based on the next 12 months of earnings, has fallen 17 percent in 2018. That’s the third-biggest drop in valuations since 1991, which is as far back as Bloomberg data goes on that metric. That’s only 1 percentage point better than the 18 percent slide in valuations in 2008, during the financial crisis. The worst valuation drop was in 2002, when corporate profits and the economy, but not yet the stock market, were rebounding from the dot-com bust. The good news is that drops in valuations tend not to last long, especially big ones like the one this year. In a report last week, UBS strategist Keith Parker pointed out that on average the market has returned 16 percent in the year after one in which P/E ratios have dropped significantly. In fact, going back to World War II, there have been only two years in which the market has dropped after a more than 1 percentage point drop in valuations the year before. Parker predicts that the S&P 500 will rise to 3,200, or more than 20 percent, by the end of 2019. On top of the valuation drop, he points to a high consumer savings rate, a rebound in companies investing in the U.S., and rising productivity as reasons the market will climb next year.
Credit markets are also not looking good. This month, with events including the arrest of Renault-Nissan head Carlos Ghosn, has unnerved credit markets that are also adjusting to higher U.S. borrowing costs and the looming end of European Central Bank stimulus measures. Investors are switching focus toward avoiding losses rather than chasing yields, with high-grade fund managers paying greater attention to individual companies’ financial health rather than riskier notes that helped boost returns last year. However, Richard Clarida, the Fed’s vice-chairman, noted some evidence of slowing global growth, suggesting he does not foresee aggressive rate hikes. In the UK, all will depend on the Brexit process, but for the moment, with London’s stockpile of unsold homes jumping to an all time high, thereby confirming the Brexit woes, there shouldn’t be any urge to tighten interest rates, quite the contrary. And in the EU, as Draghi said it himself, there is absolutely no reason to raise interest rates before the end of 2019 at the earliest.
Currency markets have held steady during this equity and credit storm. The USD is still around its strongest levels of the year against the Euro and Swiss Franc, while the USD index is about 0.5% weaker than its highest point in the year, while being up 5% year to date. Gold has also remained very stable amid all this turmoil, as did the JPY. These two barometers of risk and fear do not show anything dramatic and lead us to believe that while it was a very severe correction (which had been on the cards and awaited), markets should soon find a floor and start to rebound for the usual year end Santa Claus rally.
On this note, we will finish with a Warren Buffet line who said that “when you have sales in shops, people go and buy like crazy. When the Stock market is on sale, people should do the same, not the contrary!”
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