Weekly market recap – Damp December

US equities received a shot to the arm last week as decreasing tensions between the US and Iran coaxed investors back into a “risk-on” mind set.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 10th January 2020

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Following its price rocketing on news that US-Iranian relations have taken a turn for the worse, the cooling situation in the Middle East has seen oil begin to retrace its recent moves. Asset class returns in sterling and local currency are below; the S&P 500 hit a new all-time record on Thursday before falling slightly on weak jobs and wage data.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

US equities received a shot to the arm last week as decreasing tensions between the US and Iran coaxed investors back into a “risk-on” mind set. The cooling situation has come in the wake of a US drone strike which resulted in a top Iranian military general being assassinated. Though Iran’s retaliatory missile strike saw tensions heighten, though the US President was quick to tweet that “all is well” as the Pentagon announced that there were no casualties. Despite the Iraqi Parliament now calling for the US and its allies to now withdraw its military presence, the domestic challenges faced by all sides suggests that further military action in the short term is unlikely.

Source: Bloomberg

With investors’ attention now turning from geopolitics back to economics, it was no surprise that equity markets dipped from their highs following a weak US jobs report on Friday. While the December jobs figure itself was positive e.g. no signs of a looming recession, the figure came in below expectations. Digging down into the report made for grim reading regarding the manufacturing sector. It revealed 12,000 manufacturing jobs were lost in December making a bleak overall picture for 2019: manufacturing contributed just 46,000 new jobs last year versus 264,000 in 2018. As we know, weakness within the manufacturing sector isn’t a new theme and we have discussed its prevalence numerous times over the last year.

In addition to weaker than expected employment data, a second set of headlines related to employment statistics also made for a bit of a shock last week. Anaemic wage growth in December saw the year-on-year growth figure for average hourly earnings in the US fall below 3% for the first time since mid-2018. With full employment in the US, we would expect that additional competition for new staff would be putting upward pressure on wages, but there is no sign of it.

Source: Bloomberg

Overall, there is little concern that the US will slip into a recession tomorrow. However, some commentators are becoming nervous that the weakening job and wage statistics may be the start of a broader trend which could see the US economy losing steam and seeing growth flat line. Indeed, neither of these data releases will be taken as a particularly bullish signal by the US Federal Reserve, so we could expect the Fed’s current policy of holding rates to continue for the time being.

STAT OF THE WEEK: 0.4% – UK productivity growth per annum since 2008 (ONS).

Data correct as at: 01/10/20

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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