Invesco Canada blog

Insights, commentary and investing expertise

Kristina Hooper | October 29, 2019

Will this week’s data confirm last week’s optimism for stocks?

Last week was a “risk on” week for the markets, with stocks rising. The MSCI All Country World Index rose during the course of the week, the S&P 500 Index came close to its all-time high, and the tech-heavy Nasdaq Composite Index surged a robust 1.9%.1 U.S. Treasury yields also rose as fear dissipated – the 10-year Treasury yield rose to 1.8% and the 30-year finished at 2.29%.1 By the end of last week, there was a relatively comfortable 18-point spread between the 2-year and the 10-year Treasury yield.1

 

Propelling this optimistic environment were some positive catalysts, including expectations that the Federal Reserve (Fed) will cut rates when it meets this week and positive news flow around U.S.-China trade negotiations. These two factors were so powerful that they superseded some high-profile earnings disappointments – although in my view, earnings season in general has been relatively positive.

 

But while last week was a time of great expectations, this week is when the rubber meets the road. We will want to see continued signs that progress is being made toward Phase 1 of a trade deal. While all reports thus far are positive, suggesting the two sides are closing in on this first installation of a more comprehensive deal, I for one remain skeptical that even a Phase 1 deal will come to fruition quickly. I believe China will insist on tariff relief in order to agree to this phase of the deal, and that could be a big stumbling block for the U.S., which will want to use that bargaining chip for bigger concessions. I suspect that at some point soon – although maybe not this week –news flow will turn negative, which will likely place downward pressure on stocks.

 

Investors will also be focused on the Fed to see whether it decides to actually cut rates on Wednesday. Perhaps more important than the actual decision – since a rate cut seems to be a foregone conclusion – will be the press conference and Fed Chair Jay Powell’s messaging about the future of Fed policy. In particular, we could see a less accommodative tone, which would undoubtedly rattle stocks.

 

I remain optimistic that Powell will be able to carefully craft his words and will convey the message that that Fed stands ready to continue accommodation if necessary. I believe that’s all that investors need to hear to be satisfied, and so if Powell delivers, I expect stocks to have a neutral to slightly positive reaction to the actual decision and press conference. However, there is always the possibility of a communication error, and in such a case I would expect some short-term volatility.

 

We also have ongoing Brexit drama. In my view, news that the EU has granted an extension through January is a welcome reprieve that should provide a nice boost for U.K. equities in the very short term. But while this is good for the stock market, it only prolongs the uncertainty. And we have historically seen economic policy uncertainty weigh down on business investment, so I would expect that to continue. Despite this development, expect to see continued volatility for equities, gilts, and the pound as U.K. Prime Minister Boris Johnson attempts to hold elections in December, and other Brexit-related news flow, both positive and negative, pushes them up and down.

 

In addition, a lot of important economic data will be released this week. Following are just a few events we will want to follow closely:

  • Purchasing Managers’ Index (PMI) data will be released for China. We will want to follow this closely, as I expect it will provide signs that the Chinese economy is stabilizing in the face of stimulus.
  • Key eurozone indicators around business and consumer confidence will give us insight into whether the eurozone economy could be stabilizing.

 

PMI data as well as business and consumer confidence gauges are all valuable leading indicators. In addition, the Bank of Japan and the Bank of Canada will also meet this week and will provide insights into the current state of their respective economies. I expect to hear both central banks express the view that the economic situation is improving in their respective countries.

 

Finally, we have an historic event occurring at the end of this week – after eight years at the helm of the European Central Bank (ECB), Mario Draghi will turn over the reins to Christine Lagarde. While I don’t expect to see change immediately, I do believe Lagarde’s tenure as head of the ECB will be a significant departure from that of Draghi – and she may be able to instill more confidence in markets than even he did in his tenure (and he was able to instill significant confidence). That is because I believe she will take the negative effects of negative rates seriously – something that Draghi was largely dismissive of, including in his last ECB press conference. I also believe she will be willing to explore more experimental monetary tools – perhaps even ones that can simulate fiscal stimulus – rather than just implore governments to increase fiscal stimulus.

 

I am optimistic that the ECB could be a model that other central banks such as the Bank of Japan could emulate rather than fall deeper into negative rates, or that the Fed could emulate rather than resort to negative rates (something that is becoming a growing worry in the U.S.). In any event, I would expect to see a lift for European equities if Lagarde’s messaging suggests she is open to being both accommodative and innovative.

 

All in all, I expect some hiccups in the next several weeks, as not all market expectations are likely to be met. However, I do believe the global stock market trajectory remains upwardly biased.

 

 

 

 

 

 

More from Kristina Hooper

Is global trade entering an era of ‘vigilante protectionism’?
December 11, 2019

2020 outlook: An optimistic view of capital markets
December 3, 2019

Amid a host of central bank developments, one constant remains: global market pressure
November 26, 2019

What could the upcoming U.K. election mean for Brexit?
November 19, 2019

What’s standing in the way of a U.S.-China trade deal?
November 12, 2019

The Fed gives stocks free rein to run. Can the rally continue?
November 4, 2019

Will this week’s data confirm last week’s optimism for stocks?
October 29, 2019

Should investors be scared of a Halloween sell-off?
October 22, 2019

News versus noise: Assessing the market impact of three major headlines
September 30, 2019

Markets shake off a series of unusual events
September 23, 2019

Could ‘helicopter money’ help Europe’s economy take flight?
September 16, 2019

Five things to watch in September
September 3, 2019

Uncertainty hits a high point as the trade war escalates
August 26, 2019

Beyond the yield curve: Other economic indicators to watch
August 20, 2019

Will the inverted yield curve lead to recession?
August 14, 2019

Dovish central banks to shape late 2019 markets
August 13, 2019

You can’t train a great white shark – or control global trade
August 12, 2019

Stock market sell-off underscores trade war dangers
August 6, 2019

This week the Fed will remind us that it’s the world’s central bank
July 29, 2019

Waiting for a rate cut: How much is too much?
July 16, 2019

Subscribe to the blog

Subscribe to receive notifications for: *


Do you want to subscribe in French?

Subscribe to receive e-mails from Invesco Canada Ltd. about this blog. To unsubscribe, please e-mail blog@invesco.ca or contact us.

1 Source: Bloomberg, L.P., as of Oct. 25, 2019
Important Information
All investing involves risk, including the risk of loss.
Risk on refers to price behavior driven by changes in investor risk tolerance; investors tend toward higher-risk investments when they perceive risk as low.
The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets.
The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.
The NASDAQ Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the Nasdaq stock exchange.
The Purchasing Managers’ Index (PMI) is a commonly cited indicator of the manufacturing sector’s economic health.
Brexit refers to the scheduled exit of the U.K. from the European Union.
U.K. gilts are bonds issued by the British government.
The opinions referenced above are those of the author as of Oct. 28, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.