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Market Commentary, December 10, 2018 For the week of December 10, 2018

Key Market Data

11/30/2018 12/07/2018 One Week Change YTD One Year
S&P 500 Index 2,760.17 2,633.08 -4.60% +0.32% +1.80%
MSCI EAFE Index 1,809.56 1,768.48 -2.27% -10.97% -8.52%
Barclays Capital U.S. Aggregate Bond Index 2,009.68 2,026.85 +0.85% -0.95% -0.77%
10-year Treasury Note Rate 2.989% 2.847% -14.2 basis points +44.1 basis points +48.3 basis points

Last Monday, investors around the globe celebrated the truce in the trade war between China and the United States that had been brokered in Buenos Aires, sending stock indexes from New York to Shanghai soaring. But on Tuesday, doubts about the details of the truce, later coupled with the arrest of a high-level Chinese executive in Canada at the request of the United States, sent markets into a tailspin. By the end of the day on Friday, the Dow (-4.5 percent), S&P 500 (-4.6 percent) and Nasdaq (-4.9 percent) had all endured their worst week since March, with the Dow sliding into the red for 2018 while the Nasdaq fell into correction territory (a decline of 20 percent from a recent high). Not surprisingly, investors sought safety in bonds, and the yield on the ten-year Treasury continued its rapid retreat from 3 percent, seeing its biggest one-week drop in three years and closing at 2.847 percent.

Doubts about the truce began to emerge on Monday after President Trump called himself "Tariff Man" in a tweet, and later said he was going to get a "REAL DEAL" or "no deal at all." He also demanded that China immediately start buying more American agricultural products and natural gas and to later reduce tariffs on American cars. The White House then named the U.S. Trade Representative Robert Lighthizer as the chief negotiator with China, and Lighthizer is seen by the Chinese as a hard liner; they had reportedly hoped that Treasury Secretary Steven Mnuchin, more of a moderate, would get the job.

The stock market decline accelerated after it was revealed that on the same day the truce was announced, Canada had detained Meng Wanzhou, the CFO of Huawei, the world's biggest manufacturer of telecom equipment and a company long suspected by the West of engaging in espionage for the Chinese government. Meng, the daughter of Huawei's founder, was charged with knowingly allowing a subsidiary to sell equipment to Iran in violation of sanctions. On Sunday, China's Foreign Ministry told the Canadian ambassador to China that there would be "severe," if unspecified "consequences," if she was not released immediately.

The jobs report

The stock market continued its decline on Friday despite the fact that the Labor Department said the jobless rate remained at 3.7 percent, its lowest point since 1969, and that wages were up 3.1 percent for the year, a ten-year high, for the second month in a row. Only 155,000 jobs were created, less than forecast, but that was seen as partly the result of not enough qualified workers being available to fill open jobs.

OPEC and oil

The price of oil fluctuated again last week as investors tried to decide whether the Organization of the Petroleum Exporting Countries (OPEC) and Russia would agree to production cuts to offset the recent price plunge. OPEC met in Vienna, and after an impasse on Thursday, agreed to cut production by 1.2 million barrels a day, with most of the reduction coming from Saudi Arabia and Russia (Iran, Venezuela, Nigeria, and Libya were exempted from the deal). The agreement was seen as a sign of the new clout that Russia, a non-OPEC member but the world’s second leading oil producer after the United States, now brings to the table. Qatar, which has been at odds with the Saudis over its alleged financing of terrorism, announced that it was leaving OPEC, having been a member since 1961. An ally of the United States, Qatar is one of OPEC’s smallest producers and said it was leaving to focus on natural gas production.

A net exporter of oil, but …

Speaking of oil, for the week ending Nov.30, the United States became a net exporter of oil and fuel for the first time since at least 1973. However, the trade balance for October showed that the trade gap was up 1.7 percent to $55.5 billion, a ten-year high. Exports were down 0.1 percent and the deficit wasn’t helped by the fact that the dollar remains strong while China’s yuan has been declining, making American exports more expensive.

A two-week extension

There was another truce of sorts negotiated last week when Congress agreed to a two-week extension to keep the government running – funding for seven departments was due to end last Saturday. The extension runs until Dec. 21.

A smooth transition in Germany

When Germany’s Chancellor Angela Merkel announced in October that she was stepping down as the leader of the Christian Democratic Party, there was concern that the country would drift sharply left or right. Those fears were somewhat allayed last week when her successor Annegret Kramp-Karrenbauer was named. Known to the German media as “Mini Merkel,” Kramp-Karrenbauer is seen as likely to continue Merkel’s moderate policies.

In other news, the Institute for Supply Management (ISM) said that its manufacturing index rose to 59.3 in November from October’s 57.7. The ISM’s nonmanufacturing index was 60.7 in November compared to 60.3 the month before. Construction spending was down for the third month in a row in October, off 0.1 percent from September to $1.31 trillion. The Federal Reserve’s Beige Book, based on data collected through Nov. 26, showed that “moderate” economic growth continued in most of the Fed’s twelve districts, but there was concern about rising interest rates and the trade war and some businesses were putting their capital spending plans on hold. Household net worth hit a new high in the third quarter, up by 1.9 percent to $109.04 trillion. Consumer borrowing increased 7.7 percent in October, or $25.3 billion, to $3.96 trillion. And first-time jobless claims for the week ending Dec. 1 fell 4,000 to 231,000; the four-week moving average was up 4,250 to 228,000.

A look ahead: The Brexit vote

This week’s updates will include the latest on job openings, small business optimism, the producer and consumer price indexes, industrial production and capacity utilization, and business inventories. For all of that, the most important item on this week’s calendar is the vote by Britain’s Parliament on the Brexit plan on Tuesday, with most observers still expecting that Prime Minister Theresa May will not get enough votes to pass the plan.