World share and commodity prices rose Monday as hints of progress on the U.S.-China trade standoff provided a glimmer of optimism in what has been a punishing 2018 for markets globally.
Europe’s STOXX 600 followed Asia’s lead to push 0.4 per cent higher, and Wall Street futures were up one per cent as traders tried to overcome the worst year for equities since the 2008 financial crisis.
Sentiment had improved when U.S. President Donald Trump tweeted that he held a “very good call” with China’s President Xi Jinping on Saturday to discuss trade and claimed “big progress” was being made.
The Wall Street Journal reported the White House was pressing China for more details of how it might increase U.S. exports and loosen regulations that stifle U.S. companies there.
Chinese state media were more reserved, saying Xi hoped the negotiating teams could meet each other half-way and reach an agreement that was mutually beneficial.
Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!
Economic data out of China was also unhelpfully mixed, with manufacturing activity contracting for the first time in two years, although the service sector improved.
MSCI’s broadest index of Asia-Pacific shares managed a 0.6 per cent gain, but it was still down 16 per cent for the year. A sub-index of top Chinese companies lost more than a quarter of its value.
Major indices deep in the red
The story was much the same across the globe, with most major stock indices deep in the red.
Paris made a respectable one per cent on the day, but London’s FTSE fell flat again. They are down 11 and 12 per cent for the year, respectively. Germany’s export-heavy DAX has had it worse, losing more than 18 per cent of its value.
E-Mini futures for Wall Street’s S&P 500 had gained 0.8 per cent ahead of U.S. trading. The index is off almost 10 per cent for December, its worst month since February 2009, down 15 per cent for the quarter and 7 per cent for the year.
“Simply looking at the markets would suggest that the global economy is headed into recession,” said Robert Michele, chief investment officer and head of fixed income at J.P. Morgan Asset Management.
Simply looking at the markets would suggest that the global economy is headed into recession. However, while we agree the global economy is in a growth slowdown, we don’t see an impending recession.– Robert Michele, chief investment officer and head of fixed income at J.P. Morgan Asset Management
“However, while we agree the global economy is in a growth slowdown, we don’t see an impending recession,” he said, in part because the Federal Reserve could provide a policy cushion.
“Already, commentary out of the Fed suggests that it is nearing the end of a three-year journey to normalize policy,” said Michele.
Federal Reserve Chairman Jerome Powell testifies before a House Financial Services Committee hearing in Washington on July 18. Fed fund futures have now largely priced out any rate increase for next year. (Mary F. Calvert/Reuters)
No more hikes
Indeed, Fed fund futures have now largely priced out any rate increase for next year and now imply a quarter-point cut by mid-2020.
The Treasury market clearly thinks the Fed is done. Yields on two-year debt have fallen to just 2.52 per cent from a peak of 2.977 per cent in November.
The $15.5 trillion US market is heading for its biggest monthly rally in 2 1/2 years, according to an index compiled by Bloomberg and Barclays.
European bond markets were closed Monday, but the drop in U.S. yields has undermined the dollar in recent weeks. Against a basket of currencies, it was on track to end December with a loss of 0.8 per cent but remained up on the year.
The dollar has also had a tough month against the yen. It lost 2.8 per cent this month and was last trading at just under 110. However, 2018 was mostly stable for the pair, trading all year in a range of 104.55 to 114.54.
The euro was on track to end the month higher at $1.1450 but nursing losses of almost 5 per cent over the year. Sterling made a last push to $1.28, but Brexit woes have cost it more than 5 per cent.
That was trivial compared with the drop in oil prices —Brent crude is down almost 40 per cent since its peak in October. It was last up $1.22 cents at $54.40 a barrel but down 20 per cent for the year. U.S. crude futures nudged up 96 cents to $46.29.
The supply side is tight, but my fear is that with demand weakening it will offset all these supply concerns so we could see inventories begin to pick up.– INTL FCStone analyst Edward Meir
Gold rallied almost 5 per cent in the past month to stand at $1,283 an ounce.
Copper, aluminum, zinc and nickel, however, were all down 17 to 26 per cent this year. The industrial metals are sensitive to China’s economy, which consumes almost half the global supply.
“The supply side is tight, but my fear is that with demand weakening it will offset all these supply concerns so we could see inventories begin to pick up,” said INTL FCStone analyst Edward Meir.