14 January 2019 Issue 791
Global Market Commentary
- US: China and US officials had a trade negotiations on the 7th and 8th January, the progress was good. Also, public expects that the Fed may cut interest rates. For the entire week, the Dow rose by 2.40% to 23,995.95. The S&P 500 index rose by 2.54% to 2,596.26. The Nasdaq rose by 3.45% to 6,971.48.
- Europe: The Sino-US trade consultation have been extended for one day. The market expects that it had a progress on the Sino-US trade issue, which is beneficial to the stock markets. Also, the British Parliament is scheduled to vote against Prime Minister May’s Brexit agreement next week. Over the week, the UK’s FTSE 100 index rose by 1.18%, the German DAX index rose by 1.11%, and the French CAC40 index rose by 0.93%. The STOXX 600 index rose by 1.69% to 349.20 points.
- Asia: The Sino-US trade consultation have been extended for one day. The market expects that it had a progress on the Sino-US trade issue, which is beneficial to the stock markets. Over the week, the Nikkei 225 index rose by 4.08 percent to 20,359.70. The MSCI Asia Pacific Index rose by 4.06% to 151.55 points.
- US: US employment growth data in December was stronger than expected, which made the market less worried about the economic prospect. For the whole week, the yield on the US 10-year government bond rose by 3 basis points to 2.701%.
- Europe: US employment growth data in December was stronger than expected, and US Federal Reserve Chairman Powell said the Fed will remain patient and sensitive to market risks. For the whole week, the German 10-year bond yield rose by 3 basis points to 0.237%.
- Oil: Saudi Energy Minister Falih said that Saudi Arabia is reducing the daily oil production to a level below the one in the production agreement to 10.2 million barrels. Also, the Saudi Arabia’s monthly oil production has lowered from 8 million barrels in November last year to 7.2 million barrels. Over the week, New York oil futures rose 7.57 percent to close at $51.59 a barrel.
- US dollar: Federal Reserve Chairman Jerome Powell’s monetary policy tends to be dovish, which has weakened the Dollar Index. For the whole week, the Dollar Index fell 0.529% to 95.670.
- China: The public expects that the US Federal Reserve will stop the interest rate hike plan, and the Chinese and US officials had just met this week to conduct trade negotiations, which is beneficial to the value of Yuan . For the whole week, the Yuan rose by 1.857% against the US dollar to 6.741.
- The US government shutdown is now the longest such closure in history and there is no signs of mitigation. It is reported that Trump’s budget team is working on a contingency plan to prepare for the government’s suspension until the end of February.
- U.S: The US core CPI (excludes food and energy) rose by 2.2% year-on-year for the second consecutive month in December, which is similar with the economists forecast.
- U.S: Bloomberg survey economists show that the risk of US recession in the next 12 months hits the highest point of the past six years, and the probability of recession has risen to 25%, resulting from the increased risk in financial markets, trade wars with China, and federal government shutdowns.
- U.S: The US Department of Labor announced that the consumer price index (CPI) fell by 0.1% month-on-month in December, and increased by 1.9% year-on-year, which is similar with the market expectations.
- Euro-zone: European Central Bank Management Committee Nowotny said that when the European Central Bank decides to raise interest rates, it needs to be cautious because of the slowdown in economic growth.
- Euro-zone: Statistics from the British Bureau of Statistics show that the UK’s manufacturing output fell by 0.3% in November last year, which has fallen by five consecutive months. It is lower than the market expectations of 0.4% increase; the annual decline rate was widened from 0.7% to 1.1%.
- Euro-zone: The British Parliament’s vote will be held on Tuesday, British Prime Minister Theresa May will have a speech on Monday to warn that the Parliament is more likely to block Brexit than let the UK leave with no deal.
- Japan: The Japanese Cabinet Office survey showed that Japan’s service industry index fell sharply from the previous value of 51 to 48 in December last year, lower than the market expectation of 50.7.
- Japan: The Japanese Ministry of Finance announced that Japan’s current account surplus in November last year narrowed by more than 42% to 757.2 billion yen, which is still higher than the market expected surplus of 566.3 billion yen.
- Singapore: The Singapore Bureau of Statistics announced that Singapore’s total retail sales in November last year fell by 3% year-on-year, which is higher than the market expectations of 2.4%.
|China Market Commentary|
|• Chinese Finance Minister Liu Kun said that China will increase tax cuts and fiscal expenditures in 2019.
• China will release the trade data for December today. The year-on-year growth of dollar-denominated exports is expected to slowdown to 2%, it may reflect the reduction in grab exports before the US may raise tariffs in March, and the challenges brought by the higher bases of the same period last year.
Stay investing in 2019
2018 was one of the rockiest years for equity investors since financial crisis. Major asset classes failed to beat U.S. inflation in the past year. Investors pulled money from stock and bond funds in 2018 and turned it to safe havens such as money market.
Major Asset Classes Performance in 2017 and 2018
iFund/Noble Apex, JP Morgan
2018 is a good year for cash
In the past, investors usually use bonds as a buffer when stocks turn bad. But last year stock and bond were all losers. The S&P 500 Index fell 4.39% for the year, and the bond index also lost 1.03%. However, the top money market funds provided return of more than 2%.
Investor feel anxiety because of the growing concerns in 2018, including uncertainty about interest rate increase, the U.S. trade dispute with China and slowing global growth.
Risk versus comfort
Holding some cash is wise amid so much uncertainty around the world. When interest rate increase, 3-month Libor rate increased to 2.81% at the end of 2018. It is the first time that cash became as a viable asset class for investors in the decade. Investors can get a return with minimum risk on cash equivalent assets.
If investors have a long investment horizon and enough risk profile, equity return should provide more premium to compensate equity risk. In the theory, equity is an instrument for hedging inflation risk. Based on some research papers, equity can average provide around 4% premium in the long term.
Find more ways for diversification
Investors have a powerful soothing effect when they increase their cash holdings during uncertain times. Even when the markets are not going through major disaster, people also feel comfortable. But cash will lose bargaining power in the long term.
If history has any indication, investors will recover faster if they stay the course in a diversified portfolio after the bad time. At the worst point in the bear market in 2009, most investors may increase cash holding. If they did not reinvest them to stock market, they would miss a over 350 percent by the end of 2018. Investors who had a traditional 60% in stocks and 40% in bonds recovered from financial Tsunami losses in about three years after the scariest point in the bear market.