Big bank merger. Super-regional banks BB&T and SunTrust are combining in a $28 billion merger that will create the sixth largest U.S. bank. We have been encouraged by the pickup in loan demand and valuations in the space remain attractive in our view, though regional banks continue to struggle with a flat yield curvethat has prevented the marketplace from fully realizing the value. We maintain our positive view on financials, including banks, and are encouraged by the outperformance since the December 24th market low.
Evidence of another leg down in European growth continues to stream in. The European Commission cut its GDPgrowth forecast for 2019 from 1.9% to 1.3% overnight, warning that Brexit and China may worsen the outlook. Italy’s revision was the most negative, from 1.2% to 0.2%. The latest data told the same story, as industrial production in Germany contracted in December by 0.4%, versus expectations for 0.8% growth, suggesting the country may have entered a technical recession in the fourth quarter. In addition, the Bank of England cut its U.K. economic growth forecast for 2019 this morning-from 1.7% to 1.2%-and noted that Brexit risk had risen. Finally, Europe’s economic surprise indexes have lagged far behind those in the U.S., Japan, and China in recent months.
EM holding its own. Progress on U.S.-China trade talks, prospects for fiscal stimulus, the Federal Reserve (Fed) rate pause, and rising commodity prices all helped buoy sentiment in emerging market (EM) equities during January as the MSCI Emerging Markets Index returned 8.8% for the month (the MSCI EM Index is flat so far in February). Since the S&P 500 Index’srecord high on September 20, 2018, EM has returned 2%, ahead of the roughly 6% declines in both the S&P 500 and the developed international equity benchmark (MSCI EAFE).
Initial jobless claims lower. Weekly initial unemployment claims came in at 234K, above the 221K expected but below last week’s 253K. The four-week moving avg., a better gauge of labor market trends, also ticked up ~4.5K to ~225K; however, the 1.2% insured unemployment rate was unchanged from the prior reading and remains at multi-decade lows. Overall, the data continue to suggest the labor market, and by extension the U.S. economy, remain in good shape.
NEW Street View Video: Putting the Recent Market Rally into Context. Chief Investment Strategist John Lynch puts the most recent market rally off the lows into context, discusses market retests, and shares guidance on solid fundamentals. The video will be available this afternoon on the LPL Research blog, but you can watch it now.
Monitoring the Week Ahead
- Initial Jobless Claims (Feb. 2)
- Japan Leading Index (Preliminary, Dec)
- Japan Coincident Index (Preliminary, Dec)
- Bank of England Rate Decision
- Japan Current Account Balance (Dec)
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