Market Monitor: December Mid-Month Update

Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.

Headlines and Highlights
  • US-China partial accord brings relief, questions: The announcement of a limited trade deal between the United States and China removed the imminent threat of additional tariffs and eased global trade tensions even as major issues remained unresolved. The agreement eliminates hefty U.S. tariffs in exchange for Beijing’s pledge to increase American agricultural purchases by $32 billion above previous levels over the next two years. Key details have yet to be disclosed or signed off on, and a 25% U.S. tariff on $250 billion in Chinese goods and corresponding levies by China remain in place.
  • Brexit nears reality after Conservatives’ election landslide: Prime Minister Boris Johnson’s Conservatives routed the Labour Party in the United Kingdom’s general election, all but guaranteeing the country’s departure from the European Union at the end of January. Once Parliament approves Brexit legislation as planned next month, the UK will no longer officially be a part of the EU. Both sides still must negotiate the terms for trade, security and other cross-border issues by the end of 2020.
  • Fed signals no interest-rate changes in sight: The Federal Reserve left interest rates unchanged at its December meeting and signaled it would likely keep them on hold through 2020. Despite the Fed’s pause after three rate cuts since midyear, global central banks continue to pursue accommodative monetary policies by buying billions of dollars in bonds – quantitative easing.
Chart of Interest

market monitor

Source: Bloomberg
Note: Color shows net change over the year

Still Supportive:  Central banks around the world lowered interest rates aggressively this year.

Key Takeaways
  • The pending “phase one” trade deal between the United States and China along with the tentative new U.S.-Mexico-Canada (USMCA) agreement removes for now a major market risk. The trade war is not over, however, and market volatility may continue because of the challenges of phase two. It is likely to be much tougher for Washington and Beijing to reach agreement on phase two (and perhaps phase three, four …), involving such issues as digital trade, intellectual property, cross-border data sharing and cyber intrusions.
  • The risk of a no-deal Brexit, which has hung over markets since 2016, lessened this fall but remains a threat even after the UK Parliament passes legislation to formally leave the European Union next month. Failure to reach a comprehensive trade agreement by the end of 2020 – quite possible given the complexity of the issues involved – could have serious economic consequences for both sides.
  • The dollar fell against other currencies in anticipation of the U.S.-China trade deal, which boosted investor sentiment, and is down more than 2% from its high this fall. Improvement in global economic growth next year, as forecast by the International Monetary Fund, is likely to add to pressure on the greenback, which would be a plus for non-U.S. stocks. The strong dollar has reduced international stocks’ performance by an average 3.1% annually over the past five years, based on iShares MSCI EAFE ETF returns versus the same benchmark in local currencies.
  • International stocks have kept pace with their U.S. peers in the fourth quarter, bolstered by trade optimism and data showing that Europe’s growth pace may finally be picking up. Developed international stocks as gauged by the iShares MSCI EAFE ETF have matched the iShares S&P 500 ETF with a 6.9% return since the end of September while emerging-markets stocks have been the quarter’s top asset class with an 8.7% return.
  • The U.S. economy continues to expand at a less than 2% pace, according to a blended estimate of the Atlanta and New York Federal Reserves which projects fourth-quarter GDP advancing at just a 1.3% annual pace. But a blockbuster December report showing that employers added 266,000 jobs last month underscored the strength of the all-important employment sector. Unemployment fell to 3.5%, matching its lowest level since 1969.

The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice