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Week 4 2018 In Review

 

 

Major Indexes Continue Rally

Stocks continued their winning streak in the new year, with the major indexes notching their fourth consecutive weekly gain and moving to new record highs. The large-cap indexes performed much better than the mid- and small-cap benchmarks, however. Within the S&P 500 Index, healthcare and consumer discretionary stocks led the gains, while energy, utilities, and consumer staples stocks lagged.

 

US Dollar Hits a 3 Year Low

Despite the flood of corporate earnings reports, the week’s most notable movements may have taken place in the Treasury and currency markets. On Monday, positive economic news and the end to the government shutdown helped push the yield on the 10-year Treasury note to over 2.66%, its highest level in nearly four years. (Bond prices and yields move in opposite directions.) In its initial report on fourth quarter gross domestic product, the Commerce Department said that the US economy had grown at a 2.6% annualized pace in the last three months of 2017. The number was less than expected, but GDP growth remains strong enough to drive the unemployment rate lower and, for all of 2017, exceeded the Federal Reserve’s projections.

 

Yields fell back a bit on Tuesday but then hit a new multiyear high on Wednesday after the US dollar hit a three-year low—a falling dollar makes holding Treasuries and other US assets less attractive to foreign investors. The dollar’s drop followed comments from US Treasury Secretary Steven Mnuchin, who said that a weaker dollar was good for the US in terms of export opportunities. Mnuchin later qualified his comments, and the dollar rose and bond yields fell back on Thursday after President Trump voiced support for a strong dollar at the World Economic Forum in Davos, Switzerland.

 

UK Reports Stronger than Expected Growth

The British pound strengthened along with the euro, reaching its highest level against the dollar, $1.42, since the Brexit vote in June 2016. The British economy beat consensus expectations and grew at an annualized rate of 2.0% in the fourth quarter. UK growth for 2017 came in at a five-year low of 1.8% but still outpaced most forecasts that were made following the UK’s decision to leave the European Union. UK 10-year government bond yields rose for the week.

 

ECB Makes no Change to Policy

At its January monetary policy meeting, the European Central Bank (ECB) kept its interest rate and bond-buying program unchanged, as expected. The ECB had reduced its monthly asset purchases from €60 billion to €30 billion starting in January and said it still plans to maintain that pace at least through September. The 10-year German government bond sold off during the week, sending its yield above 0.60% for the first time in six months.

 

European markets flat, while EUR Strengthens

The pan-European STOXX 600 index was little changed during a week in which investors seemed more focused on currency news than stock-specific reports. After the US Treasury secretary’s weak-dollar comments, the euro rose to a three-year high versus the greenback and finished the week at about $1.24, while the British pound strengthened to $1.42. The UK’s FTSE 100 and Germany’s DAX 30 both lost ground for the week.

 

China’s Industrial Profits Dip in December Despite Good Year

Industrial profits in China rose at the slowest pace in a year in December, capping a year of strong growth that is expected to yield to a slowdown in 2018 as Beijing presses on with its campaign to reduce credit risks in the economy.

Industrial profits increased 10.8% in December from the prior-year period in local currency terms, down from November’s 14.9% gain. For the full year, industrial profits jumped 21%, the fastest pace since 2011, driven by cuts in excess capacity, the statistics bureau reported.

Economists chalked up last month’s industrial profits slowdown to a nationwide pollution crackdown targeting smokestack industries, as well as to slower growth in inflation as measured by China’s producer price index (PPI). The PPI—which measures the cost of goods as they leave the factory gate and serves as a leading indicator for consumer prices—rose at its slowest pace in 13 months in December. Last year’s rising PPI readings underscored China’s buoyant economy, allowing the country’s industrial companies to report strong profits growth in 2017.

Growth in China’s PPI and industrial profits is expected to moderate in the coming months, as officials have pledged to rein in credit growth and take other steps to reduce risks stemming from too much debt.

 

The Week Ahead

US Earnings season will continue to be in full swing next week, along with a handful of important economic reports. Consumer-spending data will be released on Monday, the Federal Reserve’s interest rate decision will be announced on Wednesday, and Thursday brings the ISM Manufacturing Index and US auto sales. On Friday, the US January employment report and durable goods orders will both be released.

 

All the best & have a good week

Stuart

CEO

Farringdon Group

+60 3 2026 0286

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