Week from 30 December 2019 to 5 January 2020
Contrary to what the performance figures suggest, the first week of the year was a bumpy ride for stocks. Equity indices had slipped from record highs in the very last days of 2019 as investors took off some risk after a stellar year with the best returns of the decade. However, global markets flashed green again on Thursday, boosted by the People’s Bank of China. About $115bn will be injected into the Chinese economy by freeing up banks to lend more money.
Unfortunately, the paradigm changed dramatically on Friday after a U.S. airstrike ordered by President Trump killed the top Iranian military commander, Qassem Soleimani, in Iraq. Moreover, a bigger-than-expected contraction in the U.S. manufacturing sector (its lowest level since June 2009!) soured economic sentiment.
In a more volatile environment (VIX index up 4.39% WTD), Wall Street’s major stock indices finished the week with mixed results (S&P500 down 0.16%, Nasdaq composite up 0.16%). Like the S&P500, the MSCI World snapped a five-week winning streak (-0.08%). The EuroStoxx50 fell 0.24% while the Nikkei225 lost 0.76%. By contrast, the Shanghai Composite gained 2.62%.
Only three of the eleven major S&P sectors managed to stay above water. Industrials (with weapon makers such as Lockheed Martin Corp: +5.57% WTD, and Northrop Grumman Corp: +8.25% WTD, being the biggest boost to the sector) and information technology, both of which having high exposure to the Asian economy, rose by +1.14% and +0.43% respectively. Energy also fared well (+0.84%) as WTI oil futures jumped above $63 a barrel (+2.15% WTD) in the wake of the U.S. airstrike.
Materials (-2.50%), consumer staples (-1.45%), healthcare (-1.02%) and utilities (-0.81%) lagged behind.
Demand for safe-haven assets logically soared with renewed geopolitical tensions. Gold hit its highest level in four months ($1,552.40/oz, +2.55%). The 10-year U.S. Treasury yield fell 8bps over the week (-2bps for the 10-year Bund). In the credit space, almost all asset classes were up. Fifth positive week in a row for emerging debt (+0.33% WTD in local currencies), sixth positive week in a row for U.S. high yield bonds (+0.15% WTD), seventh positive week in a row for Euro high yield bonds (+0.24% WTD).