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Financial Markets Commentary For the week of February 11, 2019

Key Market Data

02/01/2019 02/08/2019 One Week Change YTD One Year
S&P 500 Index 2,706.53 2,707.08 +0.02% +8.24% +7.04%
MSCI EAFE Index 1,830.04 1,804.73 -1.38% +5.08% -7.71%
Barclays Capital U.S. Aggregate Bond Index 2,063.18 2,071.09 +0.38% +1.20% +3.22%
10-year Treasury Note Rate 2.685% 2.636% -4.9 basis points 4.9 basis points -18.9 basis points

Thanks to an end-of-day rally on Friday, the Dow finished up for the seventh week in a row, its longest winning streak since late 2017. The run continued despite disappointing reports in the second half of last week about growth in Great Britain and the Eurozone, and news that the trade talks with China seem to have stalled. Investors begin this week with three deadlines looming: Feb. 15, when the federal government will shut down again unless Republican and Democratic negotiators can craft a deal that President Trump is willing to sign off on; Mar. 1, when the tariffs on $200 billion in Chinese goods will jump from 10 percent to 25 percent unless an agreement is reached; and Mar. 29, when Great Britain will officially leave the European Union, perhaps with no exit plan in place.

Stocks rose sharply early last week as fourth-quarter earnings for S&P 500 companies continued to surprise on the upside; they’re expected to be up in double digits from a year earlier, though some forecasters now say that first-quarter earnings could be in the red.

The shutdown deadline looms

Despite the president having taken a hard line on immigration in his State of the Union speech on Tuesday night, it had appeared that negotiators were close to making a deal that President Trump would accept even though it wouldn’t provide full funding for a border wall, averting a shutdown that both parties want to avoid. That changed on Sunday when negotiations apparently broke off and Senator Richard Shelby (R, AL), said, “I’ll say 50-50 we get a deal,” adding, “The specter of a shutdown is always out there.” Earlier last week Senator Patrick Leahy (D, VT), said “I’d say we’re 95 to 98 percent done,” but added that the 5 percent that remains is “the most difficult.”

Trade talks with China

Hopes for a trade deal with China before the Mar. 1 deadline dimmed last week after President Trump said he wouldn’t meet China’s President Xi Jinping before then, as had been hoped, and the White House economic adviser Larry Kudlow said a deal was “far away.” Even so, leading American negotiators including Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer are heading to Beijing this week to continue talks.

The Brexit saga continues

Union leaders in an effort to restructure the Brexit deal that has been rejected by Parliament. Even before she left British soil, Brexiteers were roiled when Donald Tusk, the President of the European Commission, said, “I’ve been wondering what the special place in hell looks like for those who promoted Brexit without even a sketch of a plan how to carry it out safely.” After the meeting, which May described as “robust but constructive,” EU leaders made it clear that the 585-page deal would not be revised, though there was the possibility that there could be an addendum: Parliament is looking to clarify the details of the border between Ireland, which will remain in the EU, and Northern Ireland, which, as part of Great Britain, will not.

The slowdown for Great Britain and the Eurozone

While the two sides continued to dicker, the European Commission cut its forecast for growth in the Eurozone in 2019 to 1.3 percent from 1.9 percent, and the Bank of England pared its estimate to 1.2 percent from 1.7 percent, which would make 2019 the weakest year since 2009. Both the EC and the BOE cited trade tensions between the U.S. and China as a factor, and the BOE’s Governor Mark Carney invoked “the fog of Brexit” leading to “a series of tensions.”

A new oil alliance?

The Organization of Petroleum Exporting Countries (OPEC) is discussing a more formal working relationship with Russia and the nine oil-producing nations it allies with, including Mexico. The two sides will discuss the relationship in Vienna next week with the hopes of announcing an agreement at the next OPEC meeting in April.

And the nominee is …

President Trump nominated David Malpass to be the new head of the World Bank. Malpass, a former Wall Streeter and currently the Under Secretary for International Affairs at the Treasury Department, was nominated to replace Jim Yong Kim who announced in January that he would step down three years before his term ended.

The budget for 2020, a major merger, and a deal reconsidered

Because of last month’s shutdown, the White House will release its budget for fiscal 2020 in March, about a month later than usual. BB&T said it was merging with SunTrust, a $28.2 billion partnership that would create the sixth largest retail bank in the United States and be the largest deal in the banking sector in a decade. And Amazon is reportedly rethinking its plan, announced in November, to open a new headquarters in New York because of the criticism the state government has received about the tax breaks it took to lure Amazon to New York.

In other news, the Institute for Supply Manufacturing said its nonmanufacturing index fell to 56.7 in January from 58.0 in December. Because of a decline in imports from China, the trade gap narrowed in November, down 11.5 percent to $49.3 billion. In a report delayed by the shutdown, the government said factory orders fell 0.6 percent in November from October; orders ex-transportation dipped 1.3 percent. Orders for durable goods were up 0.7 percent, while orders for capital goods fell 0.6 percent. And first-time jobless claims for the week ending Feb. 2 fell 19,000 to 234,000; the four-week moving average was up 4,500 to 224,750.

A look ahead

This week’s reports will include the latest on job openings, the consumer and producer price indexes, retail sales, business inventories, industrial production and capacity utilization, and the University of Michigan’s consumer sentiment index.