PMC Weekly Review – January 14, 2019
2019 has begun with mixed macroeconomic data, but the market thus far has responded favorably, especially when compared with the sharp sell-off in equities in late 2018. The Manufacturing Purchasing Managers Index (PMI) fell to 54.1 from 59.3, its lowest reading since November 2016, signaling a downturn in manufacturing growth. This was followed by a steep fall in Treasury yields that touched their lowest levels since late January 2017. Markets reacted positively to Federal Reserve Chairman Jerome Powell’s statement that it will be patient in hiking interest rates and will be sensitive to market sentiments. This reversed the earlier impression from his December statement that the central bank's balance sheet wind-down was on ‘autopilot.’ Additionally, the nonfarm payroll data was positive, as 312,000 net new jobs were added in December, which beat expectations, and wage growth increased by 3.2%.
As we embark on 2019, some major political events are worth a deeper review, as they likely could shape markets in the coming months.
Brexit: March 29, 2019, is the day of reckoning for the UK, as it prepares to leave the EU after two years of negotiations on the nature of its planned exit. After cancelling an earlier vote on the deal planned for December 11, British Prime Minister Theresa May will table in Parliament the draft withdrawal agreement that had been negotiated between the UK and EU, which then will be put to a vote for approval on January 15. The deal is supposed to provide the UK a transition period and allow for a soft exit from the EU. If the agreement that the Prime Minister has negotiated with the EU fails to pass the House of Commons, the UK will leave with no deal at all. A ‘no deal’ Brexit, as it is commonly referred to, means that British businesses and the public must brace for a harder exit, as there would be no transition period. Both the EU and UK have ramped up contingency plans for a ‘no deal’ Brexit, as rejecting the deal is seen as the more probable scenario. Article 50 of the Lisbon Treaty is the formal plan for any country to leave the EU, allowing the UK a two-year time frame for negotiations, which ends on March 29, 2019. Extending the Article 50 period as a way to avoid a ‘no deal’ Brexit in the short term also is being discussed. That result would require the UK Parliament’s approval and the agreement of all 27 other EU member states. With so many permutations and combinations, Brexit is a political drama that the markets will be watching closely in 2019.
US-China Trade relations: 2019 has begun on a positive note for the US-China Trade relationship. Midlevel American and Chinese officials wrapped up three days of negotiations on Wednesday. The talks largely were believed to have progressed significantly, as can be seen by the markets’ positive response to their extension. This has raised hopes of higher-level talks on the sidelines of the World Economic Forum in Davos later this month. This week's meetings in Beijing are the first direct talks since President Donald Trump and his Chinese counterpart, President Xi Jinping, agreed to a 90-day ceasefire in the trade war when they met on the sidelines of the G20 Summit in Buenos Aires. The truce will end on March 1, 2019, and if there is no breakthrough in talks by then, the US is likely to raise tariffs to 25% from 10% on $200 billion worth of Chinese imports. In 2018, the US imposed trade tariffs on steel, aluminum, and several other Chinese imports worth billions of dollars, and restrictions were placed on investments. These sanctions were designed to address intellectual property theft and other alleged unfair trade practices by China. All this resulted in the highest level of trade conflict in the last three decades. A protracted trade war in 2019 between the US and China, which contributes more than one-third to global Gross Domestic Product, can have an adverse effect on both countries as well as other world economies.
Government Shutdown: The partial shutdown of the US government that began on December 22 has entered its third week. The shutdown, which affects more than 800,000 federal workers, is now the second-longest in US history, and is the result of the US Democratic-led Congress’s failure to appropriate funds for the proposed wall on the Mexican border. President Trump and the previously Republican-led Congress had asked for $5.7 billion to fund border security, and when the new Congress did not agree, he retaliated by refusing to sign legislation to fund the government, which technically led to the shutdown. Credit rating agency Fitch has warned that the US is in danger of losing its ‘AAA’ credit rating if the shutdown continues.
Increased geopolitical concerns, such as the US-China trade war and uncertainty around Brexit, along with domestic factors, such as raising US interest rates, produced increased market volatility at the close of 2018. Although the beginning of 2019 has been relatively calm thus far, the three political events highlighted above could either escalate volatility or further calm the markets. Only time will tell which of these outcomes is reached, but one thing is certain: Politics is certainly in focus as we begin 2019.
Deepankuran, Investment Analyst
Ramasubramaniam, CFA, Investment Analyst
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2019 Envestnet. All rights reserved.