Monthly Review : December 2018

Monthly Review : December 2018



United States


The President and Congress failed to agree on a new spending package, causing the US Federal Administration to partially shut down. Standard & Poor’s estimated the shutdown would cost the country GDP USD 1.2bln per week. While the number may seem impressive, it should not have a material impact on the USD 19trn economy in real terms. Despite heightened volatility in equity markets, economic numbers emanating out of the US were encouraging.  The unemployment rate held steady at a multi-decade low of 3.7%, wages are still on an uptrend and GDP growth, while slightly below expectations, is robust.


Euro area


Uncertainties induced by global trade war fears as well as the “yellow vest” anti-government protests weighed on sentiment in December, causing the Eurozone PMIs to fall. The impact was particularly felt in France, where PMIs fell below the 50 point mark, generally considered the level under which businesses are not expanding anymore. According to the National Institute of Statistics and Economic Studies, growth of the Eurozone’s second biggest economy is also likely to soften in the last quarter, due to the violent protests.


United Kingdom

The uncertainty over Brexit is weighing on UK business and consumer confidence, as the risk of a “no-deal” scenario is growing. UK PMI for the service sector, which represents nearly 80% of the UK economy, fell to a 16-month low. The value of the pound fell against other currencies, making imports more expensive, contributing to a potentially higher inflation. The property market is another sector of the economy hit by the risk of a disorderly Brexit. Indicators of supply, demand and house prices, published by the Royal Institution of Chartered Surveyors, have reached multi years lows.


After five quarters of growth, Swiss economic output contracted by 0.2% in the third quarter of 2018. Weaker international growth, a strong CHF as well as soft domestic demand curbed exports. The Secretariat for Economic Affairs lowered its growth forecast for 2019 and 2020 to 1.5% and 1.7% respectively. In its assessment it states that “negative risks clearly predominate for the global economy at present” and that if the trade dispute between the US and other major economies develop further, the global economy would slow down faster and Swiss foreign trade and investment would suffer.


Central banks:


Federal Reserve (next meeting: January 30th)

Against a backdrop of markets selling off, softer growth expectations and intense pressure from Donald Trump on Jerome Powell not to raise rates for the fourth time this year, investors speculated whether the Fed would continue on its hawkish course or not. In the end, it held its nerve and hiked by a quarter of a percent but also lowered its forecast for 2019 rate hikes from three to two. In the press conference following the announcement, Jerome Powell was noticeably less optimistic about the growth outlook for the US economy next year. The stock market reaction to the decision was negative, and stocks were sent further into bear territory.


European Central Bank (next meeting: January 24th)


The ECB made no changes to key interest rates in December and it confirmed its net asset purchases, implemented under the non-standard policy measures, would finish the end of December 2018. The Bank will however still proceed with reinvestment of coupons and principal of the existing stock of bonds. Mario Draghi was however quite downbeat on the Eurozone economic growth prospects, suggesting risks to growth were still broadly balanced but tilted to the downside. The governing council also revised lower its projections for real GDP growth in 2018 and 2019.


Bank of England (next meeting: February 7th)


The Monetary Policy Committee assessed that the near-term outlook for global growth had softened and downside risks to growth have increased. It also noted that “Global financial conditions have tightened noticeably, particularly in corporate credit markets”. In their view the recent drop in oil prices should be supportive for advanced economies and disinflationary for the UK – the Bank estimates UK CPI is likely to fall below 2% in the coming months.


Swiss National Bank (next meeting: March 21st)

At its December meeting, in a widely anticipated decision, the SNB left its interest rate on sight deposits unchanged at -0.75%, maintaining its expansionary policy. In its outlook, the Bank expects solid growth in the coming quarters. It also sees significant risks that could have the potential for damage, including political uncertainties and protectionist tendencies. It also warned the uncertainty alone can curb growth and weaken the economy.



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Market issues:

The Bank of Canada held its interest rate unchanged at 1.75%, which was widely anticipated. The Bank was less confident in economic outlook for the country and conditioned the future stance of its monetary policy to the persistence of the oil price shock.

■ In another step in the trade war escalation, Meng Wangzhou, the Chief Financial Officer of the Chinese electronics giant Huawei, was arrested in Canada and faces extradition to the US. She is accused of breaking American sanctions on Iran.

■ In the first week of December, segments of the US yield curve inverted with the 2-year tenor yielding more than the 5-year. Investors were concerned as it implies bond buyers favor long-term security over return on capital. The more closely watched 2-10 year spread has not yet inverted.

■ The Bank of Japan maintained its ultra-loose monetary policy and confirmed it optimism on the domestic economy, despite growing uncertainties abroad.

■ At the G-20 in Argentina, US President Donald Trump and Chinese President Xi Jinping agreed on a temporary truce in the escalating trade dispute. Both parties agreed on a 90-day period where no new tariffs will be put in place, while a more lasting agreement is negotiated.

Oil continued its slide with WTI losing more than 40% from its top in October. The main reasons invoked for the decline is global oversupply and concerns over global growth.

■ With volatility rising and equity markets falling, developed market benchmark government rates fell, as investors fled to safety in the form of sovereign bonds.

■ In the pre-Christmas week, US Stocks posted their worst weekly fall in a decade. However, on December 26 the Dow Jones Industrial Average Index added more than 1080 points, its biggest points gain in history.


Credit Markets:


■ French infrastructure group Vinci SA announced it will buy a 50.01% majority stake in Gatwick Airport for GBP 2.9 billion. The acquisition of the UK’s second busiest airport is expected to be completed in H1 2019 and will be primarily funded with GBP denominated debt.

■ Moody’s downgraded Anheuser-Busch InBev’s credit rating by one notch to Baa1, warning that its decision to cut its dividend is not enough to meaningfully reduce leverage over the next few years. AB InBev’s debt swelled to around USD 100 billion following its acquisition of SABMiller in 2016 and since then sales have been impacted by the shift towards craft beers in the US and weaker economic growth in certain emerging markets.

■ Chinese state-owned oil major Sinopec suspended two senior executives at its trading arm Unipec after government inspectors uncovered severe trading losses in the second half of 2018. The losses coincided with the rout in global oil prices.

■ The troubled supermarket group, Distribuidora Internacional de Alimentacion SA (DIA SA), moved nearer to securing a new liquidity line of EUR 200 million from its banks in a bid to fight off insolvency. The deal is dependent on the sale of two units and a EUR 600 million capital increase from shareholders.  Shares in Spain’s third largest grocer fell by 90 per cent in 2018 and its credit rating was cut from investment grade to CCC+ in the fourth quarter.

Enel failed to notify investors on time that it would call its 6.5% hybrid bonds in January due to a “procedural issue”.  The hybrid notes had already been refinanced in May and after missing the 30-day notice period to redeem them early, Enel faces the costly choice of leaving the notes outstanding until 2024 or offering to buy them back at a premium via a tender offer.


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