Monthly Review : January 2019

Monthly Review : January 2019


United States

After a disastrous December, 2019 started on a brighter note. Equity markets rallied strongly and the 35 days long US government shutdown, which was the longest in US history and cost the economy USD 11bln, did little to curb investors’ enthusiasm. Trade tensions somewhat faded, as the US and China held talks and made progress on narrowing the trade deficit, but US Commerce Secretary, Wilbur Ross stressed that a deal on the key issues was still far from being found.


Euro area

Industrial output in Germany fell sharply for the second month in a row. The consensus expected a rise of 0.3% in November but data showed a drop of 1.9% in November, which followed a decline of 0.8% in October. It raised concerns that Europe’s largest economy might head for a recession. More bad news emerged from Germany as the IHS Markit Manufacturing Purchasing Managers’ Index in January fell just below 50, indicating a contraction in factory output.


United Kingdom

Theresa May’s Brexit plan was rejected in the UK parliament in what was the largest defeat experienced by a sitting government in history.  In another vote held later in the month, MPs backed an amendment to send Theresa May back to Brussels to renegotiate a new deal with the EU that includes “alternative arrangements” to the controversial Irish backstop. House prices growth continued to fall as buyers fretted over the implications of a potential no-deal and delayed their purchases by a few months until the outcome become certain. Consumers are also the most pessimistic about the future of the UK economy in seven years according to the GfK gauge of expectations survey.



Each year, audit and consultancy firm PwC conduct a survey of over 1300 CEOs around the world on their sentiment for the year ahead. The survey has showed over the last decade a strong correlation between CEO expectations for their own company’s revenue growth and global GDP growth. The survey found that Swiss CEOs were more pessimistic than the average – 47% of Swiss CEOs think global economic growth will decline compared to 29% of all global CEOs. Only 27% of Swiss CEOs expect global economic growth to improve over the next 12 months, below the global average of 42%.


Central banks:


Federal Reserve (next meeting: March 20th)

In a clear change of direction, the Federal Reserve left interest rates unchanged and put on hold future hikes, stating It will now adopt a wait and see approach regarding policy changes. In its case against raising rates, the Fed cited muted inflation pressures, which are likely to remain so given the sharp drop in oil prices. Jerome Powell also gave guidance on plans for the Fed’s balance sheet, which has been a source of worry for the last few months. He indicated the Fed would remain flexible and was ready to adjust its normalization policy should the economy and financial markets justify it.


European Central Bank (next meeting: March 7th)

European Central Bank rates were left unchanged by the Governing council. Mario Draghi highlighted the risks the Eurozone is facing and changed his language for the outlook from “broadly balanced” , cautioning that the risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility. Even though the Central Bank stopped its net asset purchase program, it assured the bank had all of its “toolbox still available”.


Bank of England (next meeting: February 7th)

Shortly after the rejection of Theresa May’s Brexit plan, the pound rallied. Mark Carney interpreted the vote as a change of sentiment, showing less support amongst lawmakers for the UK to leave the EU without a deal. On the other hand, he cautioned that he put little weight on short term moves. In its monthly statistic on borrowing and deposits by household and businesses, the BOE found out that the annual credit growth slowed to 6.6% in December, and noted credit card borrowing was particularly weak.


Swiss National Bank (next meeting: March 21st)

The Swiss National Bank expects an annual loss of CHF 15bln, mainly attributable to the weak performance of the equity markets. Its foreign holding include, amongst others, more than USD 3.5bln in Apple stock as well as more than USD 2.5bln in stock. The strong value of the CHF also contributed to the fall in the value of it foreign currency holdings.


Market issues:


  • With investors less focused on the consequences of a potential global economic slowdown, tighter supplies on the back of US sanctions on Venezuela and Saudi Arabian production cuts, oil prices rose in January, breaking a three month downward move, and posting its best January performance on record.
  • In Venezuela, opposition leader and president of the National Assembly, Juan Guaido, declared himself President of the troubled South American nation. He promised to assume executive powers, form a transitional government and hold free elections, in an effort to topple Nicolas Maduro. The US swiftly recognized Guaido as the interim President.
  • Gold also posted strong gains in January and traded at its highest level in 8 months. The move was helped by a dovish Fed which called for a pause in interest rate hikes, which in turn calls for a weaker dollar, helping the bullion.
  • The US charged Chinese technology company Huawei on allegations the company stole technology from an American competitor and it violated trade sanctions against Iran. Moreover, US authorities have requested to extradite Huawei Chief Financial Officer Meng Wanzhou from Canada.


Credit Markets:


  • PG&E filed for Chapter 11 bankruptcy protection in order to reorganize itself. The utility is facing liabilities in excess of USD 30bln after California wildfires that were blamed in part on equipment owned by the company. Before that, the company said it would not pay interest on bonds due in 2040. This would also have triggered a default.
  • On January 25, a dam owned by the world’s biggest iron ore producer Vale collapsed. The disaster claimed close to 100 lives and more than 200 are still missing. This is the second mine disaster in three years for Vale, as in 2015, a dam owned by Samarco Mineracao SA, a Vale joint venture with BHP Group, also collapsed. While the financial impact at this point is unquantifiable, Vale faces multiple risks stemming from the disaster as it almost certainly will be liable to remediate and compensate for environmental and personal damage.
  • On January 29, Fitch Ratings downgraded both Pemex Long-Term Foreign- and Local-Currency Issuer Default Ratings by two notches to BBB-, one step above the non-investment grade segment. Fitch downgrade is motivated by the continuing under-investment in the company’s upstream business, which could lead to further production declines, as well as large cash extraction from the government, resulting in negative free cash flow. This has contributed to a rapid deterioration of PEMEX’s standalone credit profile, which represents the credit profile of the entity without the support of the government, from B- to CCC according to Fitch.
  • Apple reported its earnings for the fourth quarter which were largely in line with expectations. This came after Apple shares reached their lowest level in a year and a half as the technology giant warned on its revenues for this particular quarter. The company said it was facing weaker demand in China.
  • CNOOC, the Chinese state-owned energy group, announced that it has made the largest discovery of gas in the UK’s North Sea in more than a decade. The latest discovery in its Glengorm project, east of Aberdeen, could be close to 250 million of barrels of oil equivalent.  CNOOC is the operator of the license with a 50 per cent stake and the remainder is equally owned by France’s Total and Italy’s Edison.
  • The world’s largest brewer, Anheuser-Busch InBev, returned to the market with a USD 15.5 billion mega bond sale across six tranches, attracting orders of more than USD 39 billion. The deal came as AB InBev revealed it is considering listing a minority stake in its Asia operations which will help it to cut debt load ofr more than USD 100 billion. AB InBev’s rating was cut to Baa1 by Moody’s in October on concerns that it was making slow progress reducing its debt which was swelled by the acquisition of SABMiller in 2015.


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