Weekly Market Update: Fed’s ‘patient’ comment boosts markets in the new year

Mon 07 Jan 2019

Read our full Market Update Week 1

Market Update

Stock markets carried over into the New Year the volatile behaviour seen towards the end of 2018, as economic news continued to point to a slowing global economy. Figures showed that China’s manufacturing sector contracted for the first time in 19 months in December, while Apple issued a revenue warning blaming a slowdown in sales in China. This announcement sent tech stocks lower on Thursday and saw heavy buying of safe haven assets such as the Japanese Yen. Perhaps in response to market concerns, the Fed Chairman Jerome Powell said that the Fed will be “patient” with interest rates, implying  the possibility that it will be more dovish. This saw US stocks rally and close up +1.2% YTD in Sterling terms. Elsewhere Emerging Market, EU and UK equites returned +0.1%, +1.5% and +1.6% respectively. The rallying Yen dampened returns for Japanese stocks, which were down -1.5% in local terms, although flat in GBP. Sterling fell -0.2% vs the dollar to $1.27. UK 10Y yields were unchanged while US 10Y yields fell -1.7bps to 2.668%. Oil prices rose amid supply cuts, with Brent Crude prices surging +6.1% to $57.06 a barrel. Gold also rose by +0.3% to $1,286 an ounce.

CIO Analysis

Markets staged a rebound in the first days of the year, following a dismal quarter which saw US equities dip into bear market territory. While encouraging, the rebound doesn’t change much of the underlying picture. US political gridlock is here to stay, trade wars are far from over and the global economic slowdown persists. The piece of news that made a difference was Fed Chair Powell’s comment that the central bank will be “patient” with interest rate hikes. If, however, guidance remains for a March hike then volatility could continue. The high jobs number on Friday, while good for the economy, could perplex things for the Fed, which may have to grapple with wage inflation and a rebound in oil prices, against a backdrop of slowing manufacturing. What happens within the next few weeks will probably be very informative for the year. A sustained rebound solely on Fed dovishness could mean that markets retain their Pavlovian dependence on monetary policy signals. A rebound on no news could be an indicator that the December retrenchment was technical and algo driven. A drop in January would break the 10-year upward trend and signal the end of the cycle. And then there’s Brexit, where January is likely be a crunch month for UK assets. At this point, we feel it’s best that investors maintain a steady course, rather than make knee-jerk changes in a low-visibility and technically challenged environment.

David Baker, CIO