Poor data, Brexit sees the Santa rally stumble at the end of the week

A selection of poor economic data from Europe and China took the small head of steam that had been building in the previous days, out of the equity market. Chinese retail sales were the weakest reading in five years. Industrial output there grew the slowest in three years, a potential indication of the effects of the ongoing trade war with the United States. Alongside this, on Friday Europe’s latest release of private sector business activity reported a fall. This after the European Central Bank reduced its growth and inflation forecasts at their monthly rate meeting. Brexit not only appears to be having an impact on the UK economy, equities around the globe fell. Despite better news from the US economy, US equities moved downwards alongside other global markets. The S&P 500 losing 2%, once again back to 2600. This took the US equity market back into the red for the week. Despite US equities having another poor week, the Vix index fell over the past five days. Possibly suggesting not everyone has given up on the rally into the year end.

The inverting of the 2- and 5-year US treasury yield has led economists to believe that this is the first signs the US economy is heading into a recession. In the past week yields on the 2 year have fallen, the slope between the two is flat but no longer inverted. The two and ten year is still yet to invert.

Barron’s, looking to the year ahead, focusing on what analysts are looking for in the coming year. The good news is they seem optimistic based on hopes for an easing in trade wars, some earnings growth, not the 20% we saw this year, and interest rates remaining largely accommodative around the globe. According to Barron’s, of the 10 strategists they contacted all have targets for the S&P 500 above the current level of 2600, with the average gain being 10% for next year. Despite this optimism I think it is probably fair to say that investors will be entering 2019 with far more caution than they entered 2018.

After the ECB last week, this week the Bank of Japan, the Bank of England and the Federal Reserve all announce interest rate decisions. Two out of three are not expected to make any changes, the Federal Reserve are expected to follow through with the fourth of their rate hikes this year. Other important data points this week include US final Q3 GDP growth, durable goods orders and personal spending. As for the UK economy there will be the final Q3 GDP growth, consumer confidence, inflation and retail sales.

The most waited upon will be the comments that Jerome Powell will make post the rate announcement.

Posted on December 16, 2018 .