There are no real heroes left in the world of politics, just survivors. The split of markets post 2008 has become manifested in the middle class both in the US and in Europe. Many see the need for action heroes in both places. We all want someone to swoop done and correct the inherent unfairness of it all whether its UK Brexit, China trade, US foreign policy or European rules on spending. Growth and inflation continue to be the reality checks for the investing world where there are no such action figures to replace Merkel or Draghi in 2019. Even worse, the US mid-terms have left the markets stuck in gridlock. The lack of faith shows up in the way markets price oil and the USD. For most of 2018, the USD has been the action hero that provided the safe-haven against the rest of the world’s problems. US divergence in rates and growth led the USD and much of that is now in question for 2019. Whispers about the FOMC changing their bias from tightening to neutral or fears that US tariffs will come back to bite in 2019 are driving something very different into the month end of November. Instead of a magical toy-land of action heroes driving a Christmas rally in risk. The other barometer is oil which has become disenchanted with the power of OPEC and fears the US energy independence. The relationship of oil to the USD to technology maybe the place to focus in the next week. 

What Happened over the Weekend?

• UK/EU approve Brexit deal. The Sunday deal now needs UK parliamentary approval. UK can start talks with EU after its March exit. EU leaders warned that if the British parliament votes down the agreement, better conditions won’t be offered. Mrs. May urged lawmakers to back the Brexit pact. “If people think there is another negotiation to be done, that is not the case,” she said in a press conference. “This is the only possible deal.”
• US retail traffic slowed Black Friday, online sales rise. During Thanksgiving and Black Friday, traffic to U.S. stores fell between 5% and 9% compared with the same days last year, estimated RetailNext. Another measurement firm, ShopperTrak, estimated traffic fell less sharply, about 1% over the two-day period from a year ago. Internet sales for Wednesday through Black Friday surged 26.4% from a year earlier to $12.3 billion, estimated Adobe Systems Inc., which tracks activity on thousands of websites.

Question for the Week Ahead: Are markets too pessimistic on growth into 2019? The US divergence trade in 2018 is running out of steam. The idea of US rate hikes continuing faster than the rest of the world in 2019 stalls. The idea of US growth outperformance is also in play. The US ECRI fell last week. The US data was weaker and the mood swing in US equities more pronounced. The favorite reason given for the selling – fear of a US recession in 2020.  The interesting reaction in other markets was that Europe and Asia didn’t suffer as much making many see last week as more about US issues.

The G20 meetings in Argentina next Friday are setting up to be a key event risk for the year-end as many are pessimistic that much can happen to stop a prolonged US/China trade war. The hit to global growth is now put into the forecasts for 2019. The last week brought the OECD forecasts which cut 2019 from 3.7% to 3.5% for global growth. This is how they described the set up: “In many countries, unemployment is at record lows and labour shortages are beginning to emerge. But rising risks could undermine the projected soft landing from the slowdown. Trade growth and investment have been slackening on the back of tariff hikes. Higher interest rates and an appreciating US dollar have resulted in an outflow of capital from emerging economies and are weakening their currencies. Monetary and fiscal stimulus is being withdrawn progressively in the OECD area.”

The role of US trade policy in driving down business confidence and global trade stands out in the data from Europe and Asia. The pain trade last week for the US is in many ways seen as a catch up to this story.

Market Recap: The fall in tech shares, the fall in oil and the ongoing drama around US/China trade and UK/EU Brexit dominated headlines.  In between, the markets locked on the EU pushback to Italy’s budget, the holiday shopping buzz in the US and the ongoing weak data from Europe –with the flash PMIs for Germany making clear 4Q isn’t likely to show a bounce back from the 3Q soft-patch. For the US, Core durable goods orders were roughly flat in October after a decline in September that was larger than originally estimated. Weekly jobless claims also rose to their highest levels since the summer, and the University of Michigan’s gauge of consumer sentiment fell a bit more than anticipated. Measures of manufacturing and services activity, released Friday, also missed expectations. Existing homes sales in October were a bright spot, rising more than expected in October and breaking a six-month streak of declines.

Equities: The MSCI all-country World index fell 2.74% to 475.30 on the week. The MSCI EM fell 1.76%. The US markets led declines with focus on tech. Trade concerns and growth doubts rose globally.

• The S&P500 futures fell 3.58% to 2632.56 on the week. The DJIA fell 3.97% to 24285.95 and the DJIA fell 4.41% to 6938.98 on the week. The Cboe VIX rose to 21.52% on the week up 3.38 pp on the wee.
• The Stoxx Europe 600 fell 1.04% to 353.98 on the week. The UK FTSE fell 0.87% to 6952.86, the French CAC40 fell 1.56% to 4946.95 and the German DAX fell 1.31% to 11,192.69 on the week. The Italian MIB fell just 0.87% to 18,714.90 on the week.
• The MSCI Asia Pacific Index fell 0.87% to 150.56 on the week. Japan Nikkei fell 0.72% to 21,646.55 in a holiday-shortened week. Topix fell 0.61% to 1628.96.  The Hong Kong Hang Seng fell 0.98% to 25,927.68 while the China Shanghai Composite fell 3.72% to 2579.48. The Australia ASX fell 0.25% to 5716.21. Korea Kospi fell 1.67% to 2057.48 and the India Nifty 50 fell 0.85% to 10,526.75 on the week.

Fixed Income: Bonds were not much of a safe-haven this week as markets prepared for new US supply, ducked into holiday mode and wait for more information about the FOMC – with Powell and Clarida speeches a key for next week.  Last week saw more corporate spread pain and poor liquidity. Weaker US data didn’t seem to matter as much for bonds as it did for stocks.

• US bonds see curve flattening with weaker data, weaker equities – For the week: 2Y up 1bps to 2.809%, 3Y off 0.5bps to 2.836%, 5Y off 1bps to 2.866%, 10Y off 2.5bps to 3.039%, 30Y off 1.5bps to 3.302%
• Canadian 10-year bond yields fell 2.5bps to 2.334% on the week.  Dovish BOC speeches and mixed data keep market tracking commodities/US rates.
• Japan JGB yields fell 0.5bps to 0.086% on the week. Waiting for more data and more clarity from MOF for bond issuance.
• Australian 10-year bond yields fell 3bps to 2.647% on the week. Holding pattern with weaker commodities a focus, mostly focused on China/US trade.
• UK Gilt yields fell 3bps to 1.376% on the week. Brexit hopes are better than they started the week as UK PM May holds on to power.
• German Bund yields off 3bps to 0.338% on the week. Weaker flash PMI and doubts about EU/Italy matter.
• French OAT yields off 4bps to 0.718% on the week. Macron gets Merkel stamp of support but domestic pushback on policy continues.
• Italian BTP yields off 8.25bps to 3.402% on the week. Even with EU budget pushback, Italy gains.
• Spanish Bono yields flat at 1.628% on the week. Watching Italy and EU/UK Brexit issues.
• Portugal 10-year bond yields off 3bps to 1.934% on the week – tracking Italy.
• Greek 10-year bond yields flat at 4.518% on the week. Markets waiting for more on politics and ECB financial stability – banking focus.

Foreign Exchange: The US dollar index rose 0.5% to 96.91 on the week. In Emerging Markets mixed week for the USD, EMEA: ZAR up 1.2% to 13.855, TRY up 0.3% to 5.297, RUB off 1.1% to 66.34; ASIA: TWD flat at 30.90, KRW off 0.15% to 1130, INR up 1.8% to 70.696, CNY 6.9485 off 0.15%; LATAM: BRL 3.8280 off 2.3%, MXN 20.407 off 0.2%, ARS 37.50 off 4.1% - all on the week. In Crypto Currencies – another bad week – BTC off 25% to $4300, ETH off 35% to $125.

• EUR: 1.1340 off 1% on the week. Focus is on ECB policy and weaker data with oil and autos driving 1.13-1.15 keys.
• JPY: 112.90 off 0.3% on the week with EUR/JPY 128.05 off 0.65%. 112-114 with Friday holiday leaving many watching equities still for trading.
• GBP: 1.2825 off 0.2% on the week with EUR/GBP .8840 off 0.8% on the week. Is this the best case scenario for Brexit playing out?  Where is the GBP bounce? 1.27-1.30 keys
• CHF: .9975 off 0.35% on the week with EUR/CHF 1.1310 off 0.6% on the week – UK and Italy issues nag but equities and ECB doubts rising as drivers with 1.00 pivot in $.
• CAD: 1.3225 up 0.4% on the week. Market is watching BOC for next blink 1.33-1.34 sticky.
• AUD: .7230 off 0.9% on the week. NZD off 1.15% to 0.6760 on the week. Both suffer with commodities and China doubts – watching US/China trade story. .7150-.7300 key in A$.

Commodities: The S&P/GSCI total return index fell 7.09% to  2370.13 on the week. Oil is the key focus and driver of weakness again.

• Oil: $50.42 off 10.7% on the week. Brent off 11.92% to $58.80 on the week – with the break of $60 in Brent triggering stops while similar $50 level in WTI held at the close. Focus is on US inventories, Saudi pressures, OPEC meeting.
• Gold: $1223.05 flat on the week. Silver off 0.93% to $14.29, Platinum off 0.32% to $843.50 and Palladium off 4.78% to $1120.75 on the week.
• Corn: $370.50 off 2.3% on the week. Soybeans off 0.87% to $881.00 and Wheat off 1.14% to $507.25. Weather and US trade policy back in play.
• Copper: $2.8080 flat on the week.  But futures fell 1.2% to $27830. Watching China/US data. The Dec Iron Ore futures fell to $67.51 off 5.73% on the week. .

Calendar for the Week Ahead: Focus will be on the G20 meetings Friday, Trump/Xi, UK Brexit and UK May politics, Italy and its budget battle with EU, ECB speeches, FOMC minutes and speeches, plenty more US housing data, US trade, and PCE while Europe gets flash HICP, German jobs, IFO and EU economic sentiment.  In Asia, Friday brings the China PMI, Japan CPI, IP and Australian credit, BOK rate decision.

Monday, November 26: UK/EU Brexit Summit, German IFO, ECB speeches

• 0445 pm New Zealand 3Q retail sales (q/q) 1.1%p / ex autos 1.4%p
• 0515 pm Australia RBA Lowe Speech
• 0730 pm Japan Nov flash manufacturing PMI 52.9p 53e
• 1000 pm Australia RBA Kent speech
• 1200 am Japan Sep LEI 103.9p 103.9e / Coincident 114.6p 114.6e
• 0245 am French Oct PPI (m/m) 0.3%p
• 0400 am German Nov IFO business climate 102.8p 102.3e / current 105.9p 105.3e / expectations 99.8p 99.2e
• 0400 am ECB Praet Speech
• 0700 am ECB Nowotny Speech
• 0730 am ECB Couere Speech
• 0830 am US Oct Chicago Fed National Activity Index 0.17p 0.42e
• 0900 am ECB Draghi Speech
• 1030 am US Nov Dallas Fed Manufacturing 29.4p 25.0e
• 1130 am US $39bn 3M and $36BN 6M Bill Sale
• 0100 pm US $39BN 2Y note sale

Tuesday, November 27: French and Italian consumer confidence, Fed Clarida speech, US housing prices

• 0545 pm New Zealand Oct Trade Deficit NZ$59.8bn p / annual NZ$5.19bn p
• 0650 pm Japan Sep corporate service prices (y/y) 1.3%p
• 0830 pm China Oct industrial profits (ytd) 14.7%p
• 0200 am German Oct import prices (m/m) 0.4%p 0.6%e (y/y) 4.4%p 4.6%e
• 0245 am French Nov consumer confidence 95p 94e
• 0400 am Italy Nov consumer confidence 116.6p 115.8e / business 104.9p 104e
• 0600 am UK Nov CBI retail trade 5%p 10%e
• 0830 am Fed VC Clarida speech
• 0900 am US Sep FHA housing prices (m/m) 0.3%p 0.4%e
• 0900 am US Sep Case-Shiller house prices 5.5%p 5.3%e
• 1100 am ECB Mersch speech
• 0100 pm US $40bn 5Y note sale
• 0430 pm US weekly API oil inventory -1.545mb p +3.2mb e

Wednesday, November 28: BOE bank stress tests, US GDP revisions, trade deficit, new home sales, Powell speech

• 0300 pm RBNZ financial stability report
• 0300 am Sweden Nov consumer confidence 99.5p 99e / business 106.3p 106e
• 0400 am UK BOE financial stability report / bank stress tests
• 0400 am ECB Oct M3 (y/y) 3.5%p 3.5%e / private loans 3.1%p 3.2%e
• 0400 am Swiss Nov ZEW survey
• 0540 am German 10Y Bund sale
• 0700 am German Dec GfK consumer confidence 10.6p 10.5e
• 0830 am US 3Q revised GDP 3.5%p 3.5%e/ price index 1.4%p 1.4%e
• 0830 am US Oct wholesale inventories 0.4%p 0.3%e
• 0830 am US Oct goods trade deficit $76.04b p $76.70b e
• 0830 am US 3Q core PCE spending 1.6%p 1.6%e / prices 1.6%p 1.6%e
• 1000 am US Oct new home sales (m/m) -5.5%p +4.3%e / 0.553m p 0.575m e
• 1000 am US Nov Richmond Fed Manufacturing 15p 16e
• 1030 am US weekly EIA oil inventory 4.851m p 2.5mb e
• 1130 am US $18bn 2Y FRN sale
• 1200 pm Fed Chair Powell speech
• 0100 pm US $32bn 7Y note sale

Thursday, November 29: German jobs, flash CPI, UK mortgage approvals, Eurozone economic sentiment, US PCE, pending home sales, FOMC minutes.

• 0630 pm Australia 3Q private capital expenditure -2.5%p +1%e
• 0650 pm Japan Oct retail sales (y/y) 2.1%p 2.6%e
• 0830 pm BOJ Masai speech
• 0145 am Swiss 3Q GDP (q/q) 0.7%p 0.4%e (y/y) 3.4%p 3.0%e
• 0245 am French Oct consumer spending (m/m) -1.7%p 0.4%e
• 0245 am French 3Q GDP revised 0.2%p 0.4%e
• 0300 am Spanish Nov flash HICP (y/y) 2.3%p 2.1%e
• 0300 am Spanish Oct retail sales (y/y) -0.9%p -1.4%e
• 0355 am German Nov unemployment change -11k p -10ke / rate 5.1%p 5.1%e
• 0430 am UK Oct consumer credit G0.785bn p G0.955bn e / mortgage approvals 65.269k p 64.550k e
• 0500 am Eurozone Nov economic sentiment 109.8p 109.0e / business climate 1.01p 0.96e
• 0545 am Italy sells 5Y and 10Y BTPs
• 0630 am EU financial stability review
• 0800 am German Nov flash HICP 0.1%p 0.2%e (y/y) 2.4%p 2.3%e
• 0830 am US Oct personal spending 0.4%p 0.4%e / income 0.2%p 0.4%e / PCE index 0.2%p 0.2%e
• 0830 am US weekly jobless claims 224k p 219ke
• 0830 am Canada 3Q current account deficit C$15.88bn p C$15.5bn e
• 1000 am US Oct pending home sales 0.5%p 0.5%e
• 0200 pm US FOMC minutes

Friday, November 30: Japan CPI, IP and unemployment, China PMI, Eurozone flash HICP, Canada 3Q GDP, US Chicago PMI

• 0630 pm Japan Nov Tokyo core CPI (y/y) 1%p 1%e
• 0630 pm Japan Oct unemployment 2.3%p 2.3%e
• 0650 pm Japan Oct industrial production (m/m) -0.4%p +1.2%e
• 0730 pm Australia Oct private sector credit 0.4%p 0.4%e
• 0800 pm China Nov CLFP manufacturing PMI 50.2p 50.6e / services 53.9p 53.8e
• 0800 pm Korea central bank rate decision – no change from 1.5% expected.
• 0200 am German Oct retail sales 0.1%p 0.3%e
• 0245 am French Nov flash HICP (y/y) 2.5%p 2.3%e
• 0300 am Swiss Nov KoF LEI 100.1p
• 0500 am Italy Nov flash HICP 0.2%p 0.4%e (y/y) 1.7%p 1.8%e
• 0500 am Eurozone Oct unemployment 8.1%p 8.0%e
• 0500 am Eurozone Nov flash HICP (y/y) 2.2%p 2.1%e / core 1.1%p 1.1%e
• 0830 am Canada 3Q GDP 2.9%p 1.9%e
• 0900 am New York Fed Williams speech
• 0945 am US Nov Chicago PMI 58.4p 59.0e

Conclusions: Is it all about retail now? The weekend sales are a key focus and risk for the bears that have dominated the last 6 weeks of trading. The 4Q Retail Sector earnings growth is expected at 15% - half of that is due to Amazon – and the early reports even before cyber Monday selling are robust for internet sales.  Perhaps this chart and the FactSet report will be in play for changing the bearish mood into Monday.  

Or is it all about oil?  Many are looking at the price of oil as a confirmation for a bigger drop in global demand and growth for 4Q and beyond. There is a feedback loop back to consumers with lower oil prices helping at the pump and in heating homes. There is also some emerging markets that are notably winners here – India and Turkey stand out last week. Oil lower has hurt not just oil producers but also those that have benefited from oil windfalls being invested in their sector and countries – namely the US tech sector last week. Many see oil holding $50 WTI and bouncing due to an oversold condition.  That was the same argument from last week. There is a risk here for new lows as well, should the story turn negative on global growth with the G20 meetings and US/China trade dynamics clearly in the focus for such risk.