U.S.-China negotiations kick off. Investors are cautiously optimistic as the U.S. and China kicked off fresh negotiations ahead of the March 1 deadline imposed by President Trump to get a deal done, particularly after Chinese Vice Premier Liu He-the top economic advisor to Chinese President Xi Jinping-made an unexpected appearance. His presence suggests China is placing a high importance on the talks, which come on the heels of data last week that showed China’s manufacturing sector contracted for the first time since 2016. Over the weekend, President Trump said the recent weakness in China’s economy have given Beijing an impetus to negotiate, while Friday’s payroll data painted a more upbeat picture of the U.S. economy. We continue to expect the two sides to find common ground, though a full-blown deal this week is very unlikely.
China forex rose in December, though capital still fleeing.China’s foreign currency reserves rose for a second straight month, which on the surface suggests concerns about capital flight and a slowing economy may be overdone; however, a report from Bloomberg noted that much of the gains were due to positive currency valuation effects. When removed, reserves would actually have fallen by a notable amount, indicating that capital outflows remained substantial, though well below those seen in 2015.
Eurozone sentiment hits four year low. The investor sentiment index for the region fell for the fifth consecutive month in January to its lowest level since December 2014. A so-called hard Brexit, political unrest in France, and Italy’s budget struggle with the European Union are among the issues weighing on investors. Also adding to angst were data that showed German factory orders fell for the first time in four months during November. The dip compares with an increase in the prior month and is likely to renew concerns that trade tensions and an overall loss of momentum are now weighing on the Eurozone’s largest economy.
In today’s Weekly Market Commentary we gauge the opportunity from lower valuations. The significant drop in stock market valuations in recent months, based on the S&P 500 Index price-to-earnings ratio, may portend above-average stock market performance based on history. Stocks also look attractively valued relative to bonds at still-low interest rate levels when comparing the earnings (or income) generated by the two investments. Finally, though it is difficult to think long-term when markets are volatile, consider that stock valuations have historically been closely tied to future long-term stock market performance.
Economic week in review. Investors are understandably anxious these days, and they’re scouring recent economic reports for signs of an upcoming recession. In today’s Weekly Economic Commentary, we review last week’s economic reports, which whipsawed U.S. stocks, and provide our thoughts on common themes we see in current data.
The week ahead. Trade will garner the bulk of global investors’ attention this week, as a U.S delegation is in Beijing today and tomorrow for trade talks with Chinese officials, including Chinese Vice Premier Liu He. On the economic front, investors will be keen on consumer price data in the U.S. after December’s increase in wage growth reported last week (note that factory orders and durable goods data are among the releases being delayed by the government shutdown).