The season of goodwill may be in full swing, but in equity markets, festive cheer is in short supply. Stocks were on no one’s gift lists after the U.S. Federal Reserve (Fed) left an interest-rate hike under the tree. The move raised its benchmark interest rate by 0.25 percentage points to a range between 2.25% and 2.5% and the reaction was sharp. Global markets generally seemed to feel that the comments accompanying the Fed’s decision weren’t turtle-y dovish. The U.S. central bank now expects two more increases in 2019–down from its previous projection of three–but it has changed what it deems to be a “neutral” level for interest rates from 3.0% to 2.8%. If its predictions for the timings and extent of rate increases are accurate, interest rates most likely will go above neutral next year.
The rate hike was widely expected, and all three of the main U.S. equity indices had started the week in “correction” territory after declining more than 10% from their previous peaks. Furthermore, the U.S. broader-market S&P 500 Index’s1 plunge in the aftermath of the decision was its most severe response to an interest-rate increase in nearly 25 years. The index was down 5.1% for the week as of the close of the markets on Thursday, December 20.
Rome and Brussels sprout new spending deal
Markets in other regions mirrored the U.S. The FTSE World Europe (ex UK) Index2 dropped 3.2% despite news that the Italian government finally agreed a spending plan with the European Commission. The deal means that Italy’s populist government will have to delay its “minimum income” program. In return, the Italian government should avoid heavy fines for breaking euro-area budgetary rules.
Neither was there much seasonal good cheer in the UK. The brouhaha over Brexit continued to snowball. On Thursday, a cross-party group of Conservative and Labour members of parliament engineered a Christmas truce in an attempt to stop a “no-deal” departure from the European Union. The idea is for the group to express its dissatisfaction with UK Prime Minister Theresa May’s plans before Parliament votes on them in early January. Meanwhile, we think that Mrs. May and the leader of the opposition are unlikely to “kiss and make up” under the mistletoe. On Monday, Jeremy Labour Party leader Jeremy Corbyn announced that he was tabling a motion of “no confidence” against Mrs May. Later in the week, he denied that he had referred to her as a "stupid woman" during the prime minister’s questions session at the House of Commons. The UK’s FTSE 100 Index3 had fallen nearly 2.0% by Thursday’s close.
The widespread declines across global equity markets led investors to favor typically “safe-haven” assets. Gold was in demand, presumably not just by those with a traditional taste in Christmas gifts. The cost per Troy ounce of bullion climbed 1.6% to $1,258. Equivalent prices for frankincense and myrrh were not readily available at the time of writing.
Meanwhile, many travelers found themselves driving–rather than flying–home for Christmas. Gatwick Airport, one of the UK’s busiest, was forced to stop flights from Wednesday evening until Friday morning, after drones were spotted flying in its airspace. The flight cancellations affected more than 110,000 air passengers. Shares in International Consolidated Airlines, British Airways’ parent company, fell 0.9%. Easyjet, the operator with the most planes based at Gatwick, was down 1%.
‘Tis the season of online shopping. However, convenience brings its own problems, to which anyone who’s ever had a package stolen can attest. Fear not, however; we have found a solution. A former NASA engineer has spent six months coming up with a deterrent for package pilferers. Mark Rober’s booby-trapped “bait box” will cover any budding burglars with glitter and the smell of, err, flatulence. Sounds like a standard Christmas Day to us. More sprouts, anyone?
1 The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
2 The FTSE World Europe (ex UK) Index tracks the performance of large- and mid-cap stocks in developed markets in Europe, excluding the UK.
3 The FTSE 100 Index is a market capitalization-weighted index of the 100 largest companies traded on the London Stock Exchange.
Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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