Week In Review 12.7.2018

A week after recording its best performance in seven years the S&P 500 recorded its worst week since March as trade concerns, and a further flattening of the yield curve continued to roil financial markets.

The week started on a strong note with markets staging a relief rally following the G-20 Summit, and news that the U.S. and China had agreed to a 90-day moratorium on any new tariffs. However, optimism quickly faded as it became apparent that the two sides had agreed on little else. An announcement that U.S. trade representative Robert Lighthizer, an outspoken critic of China, had been tasked with leading trade negotiations and the arrest of Chinese tech giant Huawei’s CFO cast further doubt on the outcome of successful negotiations.

Doubts about trade led to concerns about the outlook for economic growth, which resulted in investors dumping stocks for the relative safety of bonds. As bonds rallied, yields fell, pushing the “2-10” spread- the difference between the 2-Year Treasury yield and the 10-Year Treasury yield- as low as 0.10%, its lowest level since 2007. The specter of an inverted yield curve, in which the 2-10 spread turns negative, further spooked investors given that an inversion has preceded every recession since at least 1980. Market volatility will likely remain elevated until concerns about trade and the yield curve are resolved.

OPEC and Russia agreed to cut oil production by 1.2 million barrels/day for six months, beginning in January. Separately, Qatar announced its departure from OPEC to focus on natural gas production. As the 11th largest producer in the group, Qatar’s exit will only impact OPEC oil production by 2%. However, Qatar is already the world’s largest exporter of liquid natural gas (LNG), which is increasingly in demand as countries look to satisfy growing energy needs with cleaner-burning fuels.