The world’s economies and stock markets are strong right now. Let’s start with the US.
Lots of reasons for American stock markets to keep hitting record highs:
- Third quarter GDP growth figures surprised to the upside, suggesting that the impact of the hurricanes was limited (Expected 3rd quarter annualised growth 2.6% – Actual 3%).
- The name of the next chair of the US Federal Reserve is expected this week, with governor Jay Powell tipped (ahead of John Taylor) as the leading candidate. Powell is more likely to stick with the “gradual” approach to interest rate rises which should be no problem for the markets. The market-based probability of a 3rd 2017 0.25% December ‘Fed Funds’ interest rate hike is now above 85%.
- US stock markets are being boosted by super technology firm earnings. Shares in Amazon, Alphabet (Google’s parent) and Microsoft surged after last “Super Thursday” earnings results.
- Trump is continuing to debate with Republicans in Congress looking to reduce corporate tax from 35% to 20%. Negotiations appear on track. Such a move is a further friendly move to US stocks as lower taxes directly leads to increased profitability.
US bond yields are creeping higher with the 10-year US Treasury yielding 2.43% but there is nothing dramatic going on in this gradual and predictable interest rate rise environment.
Europe: The European Central Bank (ECB) confounded many market participants by extending its market stimulus programme to at least September next year, pushing down the Euro as investors digested Mario Draghi’s refusal to call the end to crisis-era measures.
The ECB said stimulative bond purchases i.e. Quantitative Easing, would be halved from the current EUR 60 Billion per month to EUR 30 Billion but the commitment to keep the programme open-ended sent European shares higher as markets anticipated access to cheaper money for longer.
The ‘dovish’ i.e. softer monetary policy, caused the Euro to weaken as did Spain’s political disruption via Catalonia’s parliament declaring independence although the latter is having only a minor impact on financial markets, similar to the muted North Korean missile crisis influence i.e. markets don’t care.
Eurozone economic sentiment beat expectations again as it hits the highest level since 2000. Again stock market positive.
UK: Interest Rates: The UK Monetary Policy Committee will almost certainly raise interest rates (from 0.25% to 0.50%) when it announces its policy decision on November 2nd. Little market reaction is expected as Mark Carney, Governor of the Bank of England, has been signalling higher rates for a number of weeks now.
Although GBP/USD did hit 1.36 during the month on a stronger UK interest rate outlook the Pound has now eased back to 1.32.
The FTSE 100 remains close to record highs at 7,475. Remember many companies are global conglomerates not in fact representative of the UK economy. Such firms have benefitted from a lower pound as overseas earnings translate into a higher Sterling value i.e. higher company profits!
OIL: Brent crude blasted past $60 per barrel for the first time since 2015 in the latest sign that the market is tightening after a three-year glut. Oil has been boosted by strong demand as the world’s economy expands at its fastest in years, helped by prices that remain almost half what they were in 2014. OPEC (led by Saudi Arabia) output cuts made in conjunction with Russia and other large producers a year ago have also served to tighten the market. That agreement to limit production looks likely to extend well into 2018.
GOLD: Prices remain fairly subdued. The ‘yellow metal’ does well in ‘risk off’ environment when financial markets are in trouble. Investors are enjoying the opposite ‘goldilocks’ scenario right now with global economies growing but not at a fierce rate that would prompt sharp interest rate rises.
Equities
S&P 500: 2575
Nasdaq: 6690
FTSE 100: 7490
Bonds – 10 Year Government Yields
US 2.43%
EU 0.42%
GB 1.42%
Foreign Exchange
EUR/USD 1.1630 (1 euro buys 1.1630 dollars)
GBP/USD 1.3200 (1 pound buys 1.3200 dollars)
Commodities
OIL: Brent: 55.00 (dollars per barrel)
GOLD: 1310 (dollars per ounce)
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