January 12, 2018
For the week ending 12 January 2017
- US reports robust holiday sales
- Stocks extend record run
- Two Koreas resume diplomatic contact
- Merkel closer to forming German government
- US small business confidence surges
Global equities advanced strongly this week, fueled by solid global growth and robust consumer and business confidence. The yield on the US 10-year note rose 11 basis points to 2.57% in response to growing anticipation that major central banks may join the US Federal Reserve in shifting to less accommodative monetary policies later this year. The strong macro backdrop, along with concerns over the tenuous state of the Iran nuclear agreement, helped lift the price of West Texas Intermediate crude oil to $63.50 a barrel. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose to 10 from 9.25 a week ago.
US holiday sales strong
Retail sales in the United States advanced 0.4% in December and rose 5.5% in Q4 versus the fourth quarter of 2016. Sales growth for the year was the strongest since 2014, according to the US Department of Commerce.
Stocks off to fast start
As of the close of business on Thursday, 11 January, the S&P 500 Index had rallied 3.5% since the beginning of the year, the best start to a year since 1987. All three major US indices — the S&P, the Dow Jones Industrial Average and the Nasdaq Composite — set records on Thursday. Earnings season kicks off in earnest today, with analysts forecasting another quarter of double-digit earnings growth on the order of 11%, compared with Q4 2016.
North Korea agrees to participate in Winter Olympics
North and South Korea resumed talks for the first time in two years this week. The two sides agreed that North Korea will participate in the Olympic Winter Games at Pyeongchang, South Korea, next month but failed to agree on talks regarding North Korea’s nuclear program. Some observers suspect that North Korea is attempting to drive a wedge between South Korea and the US. South Korean president Moon Jae-in credited US president Donald Trump with bringing about the inter-Korean talks, saying they were the result of US-led sanctions and pressure.
Merkel, SPD to enter into formal coalition talks
More than three months after the 24 September 2017 general election in Germany, which saw earlier attempts to form a coalition with smaller parties fail, Chancellor Angela Merkel has struck a deal to enter into formal coalition talks with the Social Democratic Party (SPD), with whom Merkel's Christian Democratic Union had governed from 2013 to 2017. The SPD membership will put the matter to a vote on 21 January. Without a deal, Merkel would either have to lead a minority government or call fresh elections.
US small business confidence hits record in 2017
The National Federation of Independent Business reported this week that its confidence index, which measures the mood of US small business owners, reached a record high in 2017, averaging 104.8 for the year. Tax cuts and regulatory reform were cited as catalysts.
Strong euro makes ECB’s job tougher
The euro rose to a three-year high versus the dollar on Friday, complicating the European Central Bank’s job of trying to lift eurozone inflation toward its goal near 2%. A stronger currency lowers the price of imports and is a headwind for European exporters, potentially constraining economic growth down the road. Helping spur the advance were minutes of the December meeting of the Governing Council, which suggested the ECB could modify its forward guidance in early 2018 in response to upbeat macroeconomic data. Additionally, news of movement toward political stability in Germany added to the rally.
China denies it will buy fewer Treasuries
Chinese officials denied that they recommended slowing or halting purchases of US Treasuries as a result of trade tensions with the US. Before moderating late in the week, yields climbed to their highest levels since March amid broad weakness in bond markets against a backdrop of robust economic momentum and less accommodative central bank policies.
Trump to visit Davos
Few would have expected populist US president Donald Trump to venture to the seat of the globalist establishment, the World Economic Forum, held annually in Davos, Switzerland, but he will be the first US president since Bill Clinton to do so. Clinton attended in 2000, the final full year of his presidency.
THE WEEK AHEAD
|Tue, 16 Jan||United Kingdom||Consumer price index|
|Wed, 17 Jan||eurozone||Consumer price index|
|Wed, 17 Jan||United States||Industrial production|
|Wed, 17 Jan||Canada||Bank of Canada interest rate meeting|
|Thu, 18 Jan||China||Retail sales, industrial production, GDP|
|Thu, 18 Jan||Japan||Industrial production|
|Thu, 18 Jan||US||Housing starts|
|Thu, 18 Jan||UK||Retail sales|
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg New; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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