Global Markets

Despite the tumult in the financial markets during the week, global equities were mixed when the week ended. Losses in Asia ranged from 0.2 percent (STI) to 3.0 percent (Nikkei). All indices tumbled in Europe with losses ranging from 2.3 percent (MIB) to 4.2 percent (DAX). 

Oil prices jumped after OPEC broadly agreed to cut oil production by 1.2 million barrels per day. The agreement had been reached between OPEC members with producers outside the cartel led by Russia. Iran has been granted an exemption from the cuts as it is under sanctions from the U.S. Asian markets were already closed when the agreement was reached. OPEC will cut supply by 800,000 barrels per day with the remaining 400,000 coming from non-OPEC allies.

Reserve Bank of India

The Reserve Bank of India's Monetary Policy Committee left its repurchase rate unchanged at 6.50 percent where it has been since August. MPC members described the decision as being consistent with the "stance of calibrated tightening of monetary policy" adopted in October.

Despite weaker than expected economic growth in the three months to September and slower growth in industrial production, the statement accompanying the decision notes that the economy remains broadly on track to meet their forecast for GDP growth of 7.4 percent in the current fiscal year. Recent declines in global oil prices are expected to provide support to household consumption and the RBI remains optimistic about the near-term outlook for investment spending but cautious about the potential impact of global trade tensions on external demand. Growth is expected to remain steady into the next fiscal year but risks are considered to be skewed somewhat to the downside.

Having already lowered their inflation forecasts at the October policy meeting, the board noted that headline inflation has fallen to a surprising extent since then, mainly driven by declines in food and fuel prices. After increasing to 4.92 percent in June, headline inflation had sincere fallen to 3.312 percent in October, well below the mid-point of the RBI's target range of 2.0 percent to 6.0 percent. However, they cautioned that there is a risk of a sudden reversal in food prices and also identified other risks that could push inflation higher again, including higher global oil prices, government price supports for farmers and the potential for the central and state governments to ease fiscal policy by more than currently planned.

Reserve Bank of Australia

Once again, the Reserve Bank of Australia left its main policy rate unchanged at 1.50 percent where it has been since August 2016. The statement accompanying the decision again highlights that the global economic expansion is continuing but notes signs of a slowdown in trade, partly attributable to "ongoing trade tensions".

Turning to the domestic outlook, the RBA retains their forecast for economic growth to average around 3.5 percent in 2018 and 2019 before moderating in 2020. Mining exports and non-mining business investment are still expected to support headline growth in the near-term, though officials remain unsure about the outlook for household consumption.

The Bank remains confident about the outlook for the labour market and expects wage growth to pick up over time, albeit gradually. They retain their forecast for inflation to rise modestly from current levels around 2.0 percent to around 2.25 percent in 2019 and "a bit higher" in 2020.

Reflecting this assessment, the RBA continues to see no case for a change in policy settings for now. Low interest rates are still considered to be providing support to the domestic economy and consistent with sustainable growth and achieving the inflation target over time. Although the board has noted consistently in recent months that they expect the next move in policy rates will be higher, there remains little indication that they see a case for such a move anytime soon.

The RBA will be on vacation in January and will next meet in February.

Bank of Canada

As widely anticipated, the Bank of Canada left key interest rates on hold. The target for the benchmark overnight rate stays at 1.75 percent while the deposit rate and Bank Rate remain at 1.5 percent and 2.0 percent respectively.

Having raised interest rates as recently as October 24, the BoC would have had to have been decidedly aggressive to follow up with another tightening so soon. However, there was significant speculation about a move until quite late last month and it was only the subsequent deterioration in the economic news and slump in crude oil prices that put a real spanner in the works. As it is, the December policy statement is clearly hawkish as it shows the central bank still believing that rates need to move up into a neutral range in order to secure its price stability goals.

That said, the Bank also pointed to downward historical revisions to GDP, together with the recent weaker economic news that indicated there may be additional room for non-inflationary growth. This could hint at a flatter trajectory to future rate increases and certainly makes the January Monetary Policy Report all the more important for financial markets.

Global Stock Market Recap

Europe and the UK

Although European equities advanced on Friday, they tumbled for the week. They advanced Friday after three days of losses. Bargain hunting and the rebound in crude oil prices fueled early gains in Europe. Traders continued to keep a close eye on the developments from the OPEC meeting in Vienna. However, Friday’s weaker than expected November U.S. jobs report soured the mood among traders in the European afternoon. For the week, the FTSE was down 2.9 percent, the CAC lost 3.8 percent, the DAX tumbled 4.2 percent and the SMI was 3.3 percent lower.

In the UK, jitters over Britain's divorce from the European Union, the U.S.-China trade war and worries about global growth sapped confidence in the UK market. The British parliament is due to vote December 11 on Prime Minister Theresa May’s Brexit deal amid expectations that it will be rejected, prolonging the uncertainty over Britain’s future relations with the European Union (EU).

Crude oil prices and concerns over the trade tensions between the U.S. and China following the arrest of the chief financial officer of Huawei Technologies weighed on the markets. Huawei CFO Meng Wanzhou was arrested in Canada on suspicion of violating U.S. trade sanctions against Iran and faces possible extradition to the U.S. The development has added to uncertainty about whether the 90-day trade truce negotiated by President Donald Trump and Chinese President Xi Jinping will give the two sides enough time to reach a long-term deal.

Asia Pacific

Asian equities were mixed for the week helped by hopes the Federal Reserve may pause its interest rate increases in 2019. Markets had initially brightened this week after U.S. and Chinese leaders agreed to a temporary trade truce at the G20 meeting on Saturday. But the mood quickly soured on skepticism that the two sides can reach a substantive deal on a host of hugely divisive issues within the tight 90-day time frame set out. On the week, six of 13 indexes advanced and seven declined.

Asian stocks rallied on Monday after U.S. President Donald Trump and Chinese President Xi Jinping agreed to a 90-day truce on their escalating trade war. While Trump agreed to hold off on his threat to raise tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent on January 1st, Beijing agreed to buy very substantial amounts of U.S. agricultural, energy, industrial and other products. China and the United States also agreed to halt additional tariffs in a deal that keeps their trade war from escalating as the two sides try again to bridge their differences with fresh talks aimed at reaching a deal within 90 days.

But concerns over Sino-U.S. relations after the arrest of smartphone maker Huawei Technologies Chief Financial Officer Meng Wanzhou threatened to chill talks on some form of trade truce. Canadian authorities said they had arrested Huawei’s global chief financial officer in Vancouver, where she is facing extradition to the United States. The arrest is related to violations of U.S. sanctions though officials have so far stayed mum on the allegations. The arrest heightened the sense of a major collision between the world’s two largest economic powers not just over tariffs but also over technological hegemony.

Currencies

The U.S. dollar had a rocky week but when it was over, the currency was up against the Canadian and Australian dollars. It retreated against the yen, euro and Swiss franc. Sterling, which was unchanged against the U.S. currency, took a beating as the growing concerns about British parliamentary approval for a proposed Brexit deal prompted investors to sell the currency. A broad rally across global stocks and risky currencies had lifted the pound in early trade after U.S. President Donald Trump and China’s President Xi Jinping agreed to a 90-day ceasefire in their trade dispute to try to resolve their differences. Until the British parliament votes on the deal next week, we are going to see a steady drumbeat of Brexit headlines, which is going to keep the pound weak.

Selected currencies — weekly results

Commodities

Oil prices fell in the run up to a meeting by producer group OPEC that was expected to result in a supply cut aimed at draining a glut that has pulled down crude prices by 30 percent since October. A monitoring committee of OPEC and its allies, including Russia, agreed on the need to cut oil output. Still, lack of details could suggest such an agreement could be elusive.

In the end, after much wrangling, OPEC and Russia agreed Friday to a production cut of 1.2 million barrels a day. They defied U.S. President Trumps call to keep output high. The cuts will be taken from October production levels and will last for six months. The breakdown between each country will not be disclosed.

Indicator scoreboard

Eurozone

November manufacturing PMI was 51.8 but still pointed to the worst period for business activity since August 2016. New orders declined for a second successive month, in part due to weakness in exports. Output was up from October but only because of a rundown in backlogs and higher inventories of finished goods. However, employment continued to expand but even then by the smallest extent since September 2016. Against this backdrop, business confidence held close to October's nearly 6-year low. Meanwhile, input costs again increased at an elevated rate but inflation still eased slightly from October. Output charge inflation also remained above average, but similarly slipped to its slowest mark in 15 months. In terms of national PMIs, the best performing member state was the Netherlands (56.1) ahead of Austria (55.9) and Ireland (55.4). Greece (54.0) was not too far behind but Spain (52.6), Germany (51.8), France (50.8) and, in particular, Italy (48.6) all had a poor month.

GDP in July to September was unrevised at a quarterly increase of 0.2 percent but annual growth was trimmed from 1.7 percent to 1.6 percent. Household consumption was up a minimal 0.1 percent on the quarter and gross fixed capital formation just 0.2 percent. With government expenditure also expanding 0.2 percent, domestic demand added a meagre 0.1 percentage points to quarterly growth. Rather, the largest boost came from inventory accumulation which added 0.2 percentage points and, without a rebound in demand, could act as a brake on output this quarter. Net foreign trade was a drag despite the relative lowly level of the euro. Exports dipped 0.1 percent after a 1.0 percent gain in the second quarter while imports advanced 0.5 percent after a 1.1 percent increase. Combined, this made for a net drag of 0.2 percentage points after a neutral impact last time.

Germany

October manufacturing orders were up a monthly 0.3 percent after September was revised to 0.1 percent. However on the year declined 3.0 percent after dropping 2.4 percent the month before and its worst mark since December 2015. Intermediate orders climbed a monthly 0.8 percent and capital goods were up 0.4 percent but consumer goods declined 1.7 percent. However, the overall advance was wholly attributable to overseas demand which expanded 2.9 percent (within which, Eurozone 7.3 percent). By contrast, domestic orders shrank 3.2 percent and now stand at their weakest level since May 2017.

Asia/Pacific

Australia

Third quarter gross domestic product increased 0.3 percent on the quarter, slowing from 0.9 percent in the three months to June (second quarter). This is the weakest quarterly growth since mid-2016. On the year GDP also slowed from 3.4 percent in the three months to June to 2.8 percent in the three months to September. The decline in quarterly GDP growth was mainly driven by weaker household consumption, which grew 0.3 on the quarter after increasing 0.9 percent in the three months to June. Business investment fell 1.1 percent on the quarter after dropping 0.8 percent previously, while growth in government consumption also weakened. This was partly offset by a stronger contribution to headline growth from net exports of 0.3 percentage points, up from 0.1 percentage points previously.

Americas

Canada

November employment jumped 94,000, driven by gains in full-time work. Full time jobs increased 89,900 and part time were up 4,100. The unemployment rate decreased 0.2 percentage points to 5.6 percent, the lowest since comparable data became available in 1976. In the 12 months to November, employment grew by 219,000 or 1.2 percent, reflecting gains in full-time work (227,000 or 1.5 percent). Over the same period, total hours worked were up 2.1 percent. Employment increased in six provinces, led by Quebec and Alberta, and was little changed in the four Atlantic provinces. Non-medicinal cannabis became legal in Canada on October 17, 2018. The number of people employed in cannabis-related jobs in November was 10,400, an increase of 7,500 (266 percent) from 12 months earlier. Employment in these types of jobs trended up throughout most of 2018. Estimates for this section are three-month moving averages and are not seasonally adjusted.

Bottom line

Most equity indexes retreated in volatile trading during the week. Economic data were mixed. Canada’s employment soared above anticipated while employment in the U.S. was below the expected. Merchandise deficits in both Canada and the U.S. widened.

China will be releasing November data for merchandise trade and consumer and producer price indexes over the weekend. Because of the holiday shortened month, flash PMIs for December will be released this week. The European Central Bank meets Thursday. Tuesday, December 11 is the big day in the UK — Parliament votes on Prime Minister Theresa May’s Brexit plan. It is not expected to be approved.  

Looking Ahead: December 10 through December 14, 2018

Anne D Picker is the author of International Economic Indicators and Central Banks.