New records on Wall Street

On Friday, US stock indexes, up for the sixth consecutive week, reached new record highs following indications that a partial trade deal was imminent. Economic news, however, was not amazing. Over the week, the S&P 500 index was up 0.88% and the Stoxx Europe 600 index up 0.15%. The yield on the 10-year Treasury note fell to 1.82%.

Fears and then relief

Last week began with President Trump's threat to raise tariffs substantially if no agreement is reached with Beijing. The upward movement in equities was disrupted, 10-year Treasury yields fell again, from 1.94% to 1.82%, and the Chinese currency weakened. On Friday, words from White House economic adviser, Larry Kudlow, indicated that a partial trade deal was imminent, giving a fillip to equities while bond yields barely rose.  Meanwhile, economic data were rather mixed.

Rather disappointing economic figures

There were new records on the American stock market despite mediocre economic news.  In the US, industrial production and retail sales fell short of expectations. These figures indicate that the US economy continues to slow, with little risk of a recession in 2020, though.

In China, too, industrial production, retail sales and investment in October fell short of expectations.

In Europe, on the other hand, industrial production in the euro area surprised positively. In Germany, third quarter growth was slightly positive, contradicting expectations of a second quarter of negative growth, which means a recession for economists. This is not necessarily good news, because in the event of a recession, German politicians might consider not only using their budget surplus to boost the economy but would also be allowed some deficit spending. Politically-speaking, a fiscal stimulus approach is not yet a foregone conclusion.

The Fed's message was well received

Jerome Powell, chairman of the Fed, reiterated to the Joint Economic Committee of Congress that he was satisfied with the current level of interest rates after three consecutive cuts (i.e, no further cuts are to be expected soon). He said, however, that there were risks that the economic outlook would deteriorate further and that the central bank might then resume its rate cuts. 

Conclusion

The rise in equities over the past two months is due to improvements in monetary, economic and political terms. Monetary policies have become more accommodative, global growth is likely to re- accelerate in early 2020 (a mini cycle which is part of the big ageing cycle begun in 2009), corporate earnings have surprised positively and, most importantly, the markets remain confident about a truce in the US-China trade war.

The latter is not yet done. If it does not materialise, it would call into question the rebound expected in early 2020. The markets are therefore likely to remain fairly sensitive to rumours and leaks relating to these negotiations, especially as the economic timetable is lighter this week.

The stock markets still seem to have more upside potential, but in the short term, indices are in overbought territory. A pause or consolidation would be normal at this stage.