Global equity markets extended their recent gains, with positive signs of progress on trade negotiations, better-than-expected U.S. corporate earnings, helping to soothe recession fears and boost investor confidence.
With roughly 90% of S&P 500 companies having reported results, the third-quarter earnings season is near its end. Approximately 75% of companies have exceeded consensus earnings expectations, with overall earnings for 2019 expected to grow at around 2%, reflective of slowing global growth primarily being driven by uncertainties stemming from U.S./China trade tensions.
U.S. corporate earnings growth rate is expected to bottom out this year and reaccelerate next year to a mid-single-digit pace. Headwinds include rising labour costs, weakness in manufacturing and a strong U.S. dollar.
Recession fears also receded notably in the U.S. bond market. The yield on the benchmark 10-year Treasury note increasing for the second week in a row, bringing it to its highest level since the end of July.
Equity markets in Europe were mostly higher, buoyed by the rally on Wall Street. Approximately 80% of the EURO STOXX 600 have reported numbers, with 50% of companies surpassing consensus estimates on both the top line (revenue growth) and bottom line (net profitability).
The IMF has forecast that the eurozone will grow by 1.2% in 2019, slowing from the 1.96% expansion in 2018. The IMF largely attributed the slowdown to slow growth in Germany, the eurozone’s largest economy, and stagnation in Italy, the region’s third-largest economy.
Chinese stocks advanced for the week, as hopes rose for a comprehensive U.S.-China trade agreement, with the benchmark Shanghai Composite Index edging up 0.2%. Buying was also supported by the expected increase of Chinese stocks in the MSCI Emerging Market Index. On Thursday, MSCI said that A shares—yuan-denominated shares of companies that trade on China’s domestic exchanges—would rise to a weight of 4.1% in its widely used Emerging Markets Index from a current 2.6% weight.
Market Moves of the Week
The JSE ended the week lower, as measured by the FTSE/JSE All Share Index (-0.06%), as a Friday sell-off negated earlier gains. Equities experienced a relief rally early in the week following credit rating agency Moody’s decision late on Friday, November 1, not to downgrade South African sovereign debt into below investment-grade territory. Moody’s did, however, reduce its outlook from “stable” to “negative,”.
The rand was also negatively impacted on Friday after nationwide electricity blackouts overnight by ailing state utility Eskom spooked investors and reignited worries about the economy. The firm said it had lost three generation units, pushing its emergency reserve capacity to “critical levels”.
Statistics SA is expected to release retail sales for September next week. The median forecast is for retail sales to have risen 1.9% from 1.1% in August, according to Bloomberg.
Chart of the Week
OPEC sees oil demand plateauing with climate concerns and the rise of renewables weighing on the cartel’s forecast for demand growth in the coming decades. Starting in 2020, oil demand growth in OECD countries turns negative. India and China are reliable growth markets throughout, though to a declining degree, while demand from Organization for Economic Cooperation and Development countries continues to erode with the net result that oil demand is expected to grow by only 100,000 barrels per day in 2040, in a market with daily demand in excess of 110 million barrels.
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