Our Weekly Market Snapshot is brought to you by:
The Wealth Management Team, Capital Core Financial
Week Ending: November 16th, 2018
Published: November 19th, 2018.
Goodbye US midterms. Re-enter Brexit and Italy. A volatile week for all assets, risky and safe, as global equities fell and bond prices rose. Yields declined due to weak economic data and a continued slide for oil prices that all point to weaker growth ahead. Adding to the US yield slide were dovish comments from some Fed officials, who stated that the Fed needs to pay attention to slowing global growth and that the Fed’s rate was close to neutral. In Canada, yields were further pressured by painfully low Canadian oil prices (WCS fell below $US14). Prices at these levels are the market’s mechanism to shut-in production, a job that some Western Canadian producers have elected to start themselves, while others are now calling for the government to step in and mandate across-the-board production cuts. This scenario would not play out equally for everyone: integrated oil producers reap windfall profits from their own refining operations and the stronger exploration and production players may relish the pain being inflicted on their competitors.
The Brexit situation is fraught with great uncertainty in the very near-term and at present many paths appear possible. Initial hopes that a framework deal to orchestrate an orderly UK departure from the EU were dashed when fears of a ‘hard Brexit’ quickly returned as UK PM Theresa May faced resignations and opposition from within her own party. To us, the most likely scenario appears to be a ‘kick the can down the road’ extension of the March 2019 deadline. As for Italy, the fight to watch is not with the European Commission, it is with the bond market. Rising Italian government bond yields will eventually force the populist leadership to compromise and submit an acceptable budget.
Weakness in the tech sector added to the general risk-off tone. Shares of Apple hit bear market territory on an intra-day basis before recovering slightly, as two of its suppliers cut their forecasts, suggesting deteriorating iPhone demand. Shares of semiconductor chip maker Nvidia had its biggest drop in more than a decade after projecting a fall in revenue.
Market volatility is to be expected as aftershocks of October’s wild ride reverberate. Mending the damage is a process we expect to take some time. In our minds, the European political drama is well known and the soft economic data doesn’t bring anything new to light either. The debate remains how much will economies and earnings grow (not how much will they shrink), and what is the right discount to apply to equities in light of higher yields – and so the market’s role in price discovery continues.
Chart of the Week: Cracks Appear in Corporate Credit
Investment-grade credit isn’t immune from the weakness roiling global risk assets, as spreads on US investment-grade corporate debt widened to their highest level in two years. Concerns over debt laden General Electric sparked the sell-off, along with accusations that Pacific Gas and Electric may have played a role in sparking one of the California wildfires (fresh work for Erin Brockovich?). While these bespoke company issues may bear some of the blame, the broader issue is one of contagion as investors question the credit worthiness of the lowest rung (BBB) of the investment-grade bond universe. The BBB segment has grown from 32% of the US corporate bond market to 49% in the past decade. The collision of investors seeking to move up the credit quality spectrum, while credit quality itself is moving in the opposite direction is of concern. More broadly, the availability of credit is a key underpinning of the equity market cycle. Cracks in these metrics have appeared before and for now we see them as adding to our list of amber warnings, not flashing red; but these kinds of moves bear close watch.
The week in review
Canadian existing home sales (Oct) fell 1.6% m/m seasonally adjusted (versus -0.2% expected), leaving activity down 3.7% from a year ago. Overall, the national market is well balanced with the sales-to-new-listings ratio in line with the 10-year average.
US consumer prices (Oct) rose 0.3% m/m or 2.5% on a y/y basis (both as expected). Core prices were up 0.2% m/m, bringing the y/y pace down 0.1% to 2.1% (versus +2.2% expected). October was the first full month of 10% tariffs on $200 bln of Chinese goods.
US retail sales (Oct) jumped 0.8% m/m (versus +0.5% expected), but the prior two monthly increases were revised lower. Consumer spending should remain a healthy contributor to Q4 growth.
US industrial production (Oct) rose 0.1% m/m (versus +0.2% expected), while the capacity utilization rate fell 0.1% to 78.4% from an upwardly revised 78.5% reading in September.
US NFIB small business optimism survey (Oct) fell 0.5 to 107.4 (versus 108.0 expected).
Eurozone real GDP (Q3) rose 0.2% q/q, or 1.7% on a y/y basis. Germany fell 0.2% q/q, the first setback since 2015. Eurozone core inflation (Oct) was confirmed at 1.1% y/y.
Japanese real GDP (Q3) fell 0.3% q/q (as expected) in a period marred by a number of natural disasters.
Chinese industrial production (Oct) rose 5.9% y/y (versus +5.8% expected); fixed asset investment rose 5.7% YTD (versus +5.5% expected); retail sales rose 8.6% y/y (versus +9.2% expected).
The week ahead
Canadian inflation and retail sales data
US housing data
US durable goods orders
Minutes from latest ECB meeting
Purchasing manager indices globally
Have a great day!
Your Wealth Management Resources Team at Capital Core Financial