A swift shift in sentiment leaves investors wondering what's next for markets?

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Dec. 10, 2018


Just one week after surging to their best weekly gain in years, U.S. stocks gave almost all of it back last week, suffering their worst loss since March. It was a curious week to say the least. After receiving some reassuringly dovish commentary from the Fed the week before, stocks were poised to rally further on word from Buenos Aires of a cease fire on the trade front with China. And it came. But the rally faded quickly, lasting only through Monday, after which stocks turned sharply lower. The S&P 500 lost 4.6 percent on the week, leaving it lower on the year by 1.5 percent and back in correction territory from its high on September 20.

The shift in sentiment was swift, partly the result of a reassessment of the terms of the cease fire in the sober light of day that gave rise to skepticism about how much can be accomplished in ninety days. Neither was it reassuring that the CFO of Chinese technology company Huawei was arrested in Canada, at the behest of the U.S., on the same day that the two sides agreed to the trade cease fire, although that news was not widely reported until several days later.

But investors were also unnerved by the early week Treasury curve inversion between the three and five-year maturities. Although the importance of that development was quickly dismissed as being far less predictive of impending recession than spreads at the very short-end of the curve, it did nevertheless focus attention on the pace of economic growth, to which the trade war with China is very much tied. And it was enough to push the yield on the U.S. ten-year Treasury note down 14 basis points to 2.85 percent, and the two-year note lower by ten basis points to 2.71 percent. In the process, the spread between the two contracted to just 13 basis points, the flattest since June 2007, just prior to the start of the Great Recession. And high yield credit spreads widened an additional 21 basis points to 450, their widest in two years and up from just 316 on October 3.

The bright spots in last weeks market action

Perhaps the one possible bright spot in last week’s market action was the fact that the S&P 500 once again stabilized just above the 2630 level, ending the week at 2633. Previously, the index closed at 2641 on October 29, and at 2632 on November 23. It may ultimately prove to be small comfort, but at least for now, stocks have found some support in the vicinity of where they closed out the week. It should also be noted, however, that the index’s 50-day moving average ended the week below its 200-day moving average for the first time since April 2016.
Investors can also perhaps draw some comfort from the economic data, which at least in the U.S. continues to be mostly solid. The November jobs report was a little lighter than expected, but strong enough to maintain the unemployment rate at 3.7 percent, and year-over-year average hourly earnings at 3.1 percent. Consumer sentiment also held steady. And earlier in the week, both Institute for Supply Management (ISM) reports firmed from the prior month

Investors watching global economic data and Brexit

Unfortunately, the same could not be said by the Eurozone, where year-over-year gross domestic product (GDP) growth through the third quarter slumped to 1.6 percent, the slowest pace since the end of 2014, and down from its recent peak of 2.8 percent one year ago. In Japan, the news was mixed, as the composite Purchasing Managers’ Index (PMI) held steady in November, while the index of leading indicators rose for just the second time in six months. However, the third quarter contraction was revised sharply wider to a slump of 2.5 percent annualized, from the initial estimate of 1.2 percent. The data in China was also mixed. The composite PMI index rose on strength in services, but trade was a very different story. Measured in local currency, year-over-year growth in exports slumped to 10.2 percent in November, half the pace of October, while import activity slumped to 7.8 percent from 26.3 percent.
On the U.S. economic calendar this week we will get a look at the latest inflation readings, retail sales and industrial production. In Europe, the European Central Banks (ECB) meets as it approaches the scheduled end of its quantitative easing program. And the British parliament was scheduled to vote on the government’s proposed Brexit deal this week; however, Prime Minister Theresa May delayed the vote creating more uncertainty over how Brexit will play out.