THE WEEK IN REVIEW
US equity markets notched up positive performances last week, brushing off December headline inflation that was a touch stronger than expected. The S&P 500 rose 1.9% i (in USD) on the week, while the Nasdaq Composite rose 3.1% ii, helped by a big drop in bond yields. News that China remains stuck in deflation contributed to the MSCI China’s -1.8% iii decline (in USD). Oil prices dropped last week despite volatility around escalating Red Sea tensions.
Bonds rallied, thanks to a fall in US producer prices and despite the marginal rise in headline consumer inflation. With big bond issues from Spain, Italy and Belgium, Europe’s governments rushed to borrow money last week, as did corporate issuers, drawing record demand from investors keen to secure solid yields while they still can. Emerging-market debt issuers like Saudi Arabia also rushed to lock in the recent drop in borrowing costs.
GEOPOLITICAL RISK
US and UK strikes on Yemen’s Houthis, after their attacks on shipping in the Red Sea, have captured investors’ attention. Here, headline risk is relevant from both a flight to quality and supply side inflation perspective. In Taiwan, the ruling party secured the presidency, but lost its parliamentary majority. The president-elect offered dialogue with China, limiting tensions.
KEY DATA
German industrial production fell by 0.7% in November, the sixth consecutive month of decline. German exports rose 3.7% in November, while imports rose 1.9%. But on a year-over-year (y-o-y) basis, exports were down by 5% and imports by 12%.
The US consumer price index rose 0.3% in December from the prior month and 3.4% y-o-y. This marks an acceleration from November’s monthly rate of 0.1% and y-o-y rate of 3.1%. But core inflation, which excludes volatile food and energy prices, slowed to a y-o-y rate of 3.9% from 4.0 The US producer price index came in at -0.1% in December and at 1.0% y-o-y.
China’s consumer price index fell 0.3% y-o-y in December, the third consecutive month of disinflation. Chinese producer prices declined 2.7% y- o-y. Chinese trade data improved in December, with exports climbing 2.3% y- o-y, while imports edged up 0.2%.
MARKETS VIEW
Against the backdrop of Middle East tensions, we like gold as geopolitical risks appear underpriced to us. A scenario of higher oil price volatility and Brent above USD80 per barrel in the first half remains valid.
We are positive on Japanese equities, which are expected to be supported this year by decent dividend yield and initiatives to enhance shareholder value as well as fading inflationary pressures.
A wave of new bond issuance has met strong demand, with Spain last week seeing record demand at its 10-year bond sale, reinforcing our view that now is a good time to consider moving from cash to quality fixed-income investments to lock in the handsome yields they currently offer. This week all eyes will be on market reaction to a stream of US Q4 earnings reports, which have been mixed so far. The lowering of Q4 consensus earnings expectations sets the stage for potential upside surprises.
