The new year rally continued in February, and markets have now recovered around two-thirds of the losses sustained in the last quarter of 2018. US, European and Japanese equities moved higher but at a slower pace, all posting low single digit returns. There was a bit of rotation back into Europe which outperformed the US and Japan by more than a percent. The real stand out, however, were Chinese equities which rose over 10% on the month.
A range of factors were supportive of the surge, however the big new development was Trump’s announcement that the planned tariff increase of 10 percent to 25 percent on $200bn of Chinese goods scheduled for March 1, would be delayed until May. At the same time, the President spoke very positively about the progress of negotiations between the two countries, saying that if talks continued this way, a deal could be concluded very soon. In any case, the Chinese authorities appeared to be stimulating the economy in January as the PBOC released data which showed record high credit growth, although this reading will be impacted somewhat by the Lunar new year. Nonetheless it fuelled hopes that Chinese growth might be enough to somewhat offset slowing in the US. Europe’s economy and stock market is tied into the fate of China, so these positive developments helped it outperform the S&P and Japan.
Although it didn’t drive stock prices during the month, it is also worth mentioning the MSCI’s announcement on the 28th that it will gradually increase the amount of China A shares ‘inclusion factor’ from 5 percent to 20 percent over the course of 2019.
The data making economic news headlines in the US was a mysteriously weak retail sales print. Consumer spending in December was seen falling the most in nine years. This is surprising because wages continue to rise and energy costs are depressed, which should provide support. US consumer spending makes up two-thirds of the US economy and provides net demand to the global economy, so this sent some alarm bells ringing. While this makes us a little anxious while we cannot explain the fall, the US economy on a whole remains robust and this gives us comport for now. Indeed, Q4 GDP was 2.6% per annum beating expectations for a 2.2% rate of growth.
Turning to the bond markets, yields remained subdued and little changed during February, the market pricing in less than 10% chance of hike or cut by Jan 2020. This is not a goldilocks scenario however; growth is clearly at risk and inflation could surprise on the upside. Year-to-date, however, markets have been happy to move higher.
Anna Haugaard, CFA
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