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Friday, February 1, 2019

January 2019 - Monthly Market Commentary

January was a strong month for global risk assets as markets rebounded from the December selloff. Global equities rallied, credit spreads tightened, the USD weakened, and the oil complex rose sharply. The Federal Reserve, in a sharp reversal from December, held its benchmark rate steady, and indicated that the “case for raising rates has weakened somewhat”. The Fed also indicated greater flexibility with regard to the runoff of its balance sheet. The EU’s statistics agency indicated that economic growth in the 19 euro countries slowed to 1.8% in 2018 from 2.4% in 2017. China’s economic growth rate slowed to 6.6% in 2018, the weakest pace since 1990. The US job report showed that 312,000 non-farm jobs were added in December (the 99th consecutive month of job creation), the unemployment rate rose to 3.9%, the labor force participation rate increased to 63.1%, and average hourly earnings rose 3.2% from a year earlier.

Notable corporate transactions announced in January included the $74 billion acquisition of Celgene by Bristol Myers, the $8 billion purchase of Loxo Oncology by Eli Lilly, the $2.5 billion acquisition of Parex by Sika, the purchase of Quick Base by Vista for over $1 billion, the $10 billion acquisition of Goldcorp by Newmont, the $22 billion sale of First Data to Fiserv, the $340 million purchase of Pluto TV by Viacom, the $8 billion merger of Entegris and Versum, the $2 billion acquisition of Luxoft by DXC Technology, the $900 million purchase of ELEMIS by L’Occitane, Advent’s $700 million purchase of a 51% stake in Prisma, Bridgestone’s $1 billion acquisition of TomTom’s telematics division, Apollo’s $4.3 billion purchase of RPC Group, Asahi’s $330 million acquisition of the British beer business of Fuller Smith & Turner, the $1.2 billion purchase of a 29% stake in Avito by OLX, the $230 million purchase of HelloSign by Dropbox, the $700 million acquisition of LGS Innovations by CACI International, Medco’s $512 million purchase of Ophir, and the $3.3 billion sale of a controlling stake in Tallgrass Energy to Blackstone.

Developed market equities rose in January (see page 8), with the biggest gains in Canada (+8.7%), Hong Kong (+8%), and the S&P500 (+8%). US small caps outperformed large caps, with the Russell 2000 up 11.2% and the Russell 1000 up 8.4% (see page 3). Industrials (+11.4%), Energy (+11.1%), and Real Estate (+10.8%) were the best performing sectors in January; Utilities (+3.4%), Health Care (+4.8%), and Consumer Staples (+5.2%) were the worst performing sectors (see page 2). Large cap value (+7.8%) underperformed large cap growth (+9%) in January (see page 3). Emerging market equities were mostly higher in January (see page 9), with the largest gains in Argentina (+19.7%), China (+11.2%), and Brazil (+10.7%), and losses in India (-0.1%).

In currencies, the USD Index was lower (-0.6%) in January (see page 10). The Canadian Dollar (+3.9%), Australian Dollar (+3.2%), and New Zealand Dollar (+2.9%) had the largest gain against the USD, while the Swedish Krona (-2.1%) and Swiss Franc (-1.3%) had the largest losses. Emerging market currencies were mostly higher against the USD, with the largest gains in the South African Rand (+8.4%), Brazilian Real (+6.5%), and Russian Ruble (+5.9%), and the largest losses in the Indian Rupee (-1.9%) and Taiwan Dollar (-0.4%).

The US interest rate curve moved slightly lower in January (see page 12). 10 year rates closed the month at 2.63%, down from 2.68% at December month end. US investment grade and high yield spreads tightened in January (see page 13).

In commodities, the GSCI index was up 9% in January (see page 11), with gains in Energy (+13.8%), Industrial Metals (+5.3%), Precious Metals (+3.2%), and Agriculture (+2.2%), and losses in Livestock (-1.7%). Within individual commodities, Crude Oil (+18%), Brent Crude (+13%), and Heating Oil (+12.5%) saw the biggest gains, while Cocoa (-10.1%), Lean Hogs (-7.1%), and Feeder Cattle (-2.7%) saw the biggest losses. Gold was up 3.1% for the month.

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