Graduate Market Update

Equities US

US stock markets are at record highs with the global equity gauge rising more than 8% since the US November 8th election as growth bulls have taken heart from promises made by Donald Trump, US president, of fiscal stimulus, infrastructure spending and deregulation. But the lack of clarity regarding the new administration’s economic policies appears to be a limiting factor on the markets making further progress on the “Trump reflation” trade.

Therefore, without a doubt, the most anticipated event this week is going to be on Tuesday February 28th when President Trump makes a speech to Congress and the nation. With investors concerned at the lack of details and progress on tax cuts and fiscal stimulus, a number of investors think this speech is Trump’s first big test on this.Further US equity advances may depend on it.

Equities Europe

European and French stock markets are riding high after a three-month rally generally buoyed by the positive global tone in global equity markets and a growing belief a European economic recovery might finally be taking hold. Indeed, last week, European equity funds attracted the largest weekly inflows in more than a year (+$1.1 Billion) as investors bet on continental recovery.

Fixed Income US

Overall, markets don’t seem to have minded much about the lack of concrete policy out of this administration, but some cracks are starting to emerge in the rally. 10 year US Treasury bond yields were above 2.50% a few weeks ago as investors chose equities (favoured when investors have a ‘risk on’ mentality) over bonds (favoured when investors seek safety in ‘risk off’ times).

However, over the last couple of weeks bond yields have fallen with the 10 year US Treasury bond now yielding 2.33% i.e. equities less favoured and last week saw some weakness in infrastructure and bank stocks which had been very strong in the ‘Trump rally’ e.g. Goldman Sachs stock up 30% since Trump was elected.

Fixed Income Europe

European bond markets have a close eye idea on France’s election after the markets were wrong-footed by Brexit and the US elections with the polls very misleading. With voting on April 23rd and May 7th, this is arguably the biggest source of political risk facing the eurozone this year, and comes as data on growth and inflation show signs of improvement. Investors fear a victory for far right candidate Marine Le Pen who has pledged to pull France out of the euro.

The safest place for investors to hide in the European financial system is probably in two-year German debt. The German government not meeting such obligations in euros is closed to inconceivable. The two year ‘Bund’ is also easy to trade so it is almost a benchmark of investor anxiety. The yield reached a record low of minus 0.96% i.e. investors accepting a loss/negative return for safety of their capital.

Generally the yield premium demanded by investors to hold French, rather than German debt, has hit a post-eurozone crisis high.

Interest Rates US

Minutes of the US Federal Reserve’s (the US Central Bank) latest Open Markets Committee meeting highlighted the huge amount of uncertainty amongst policy makers about the potential impact of any fiscal stimulus. It is likely the FOMC is likely to stay cautious over raising rates this year although the market is pricing in at least 2 quarter point rises in the key ‘Fed Funds’ rate during 2017 from the current 0.50-0.75% band.

Foreign Exchange

At the beginning of January the US Dollar was at a 14-year high with the US Dollar index trading at 103.82 supported by prospects for stronger US growth and higher interest rates. However, the ‘Greenback’ fell 3-4% during most of January as investors took profits as they wanted to see hard evidence of Trump’s pro-growth policies. The US Dollar has regained approximately 1.5% of January’s loss and is stable around the 101.00 index area.

Commodities – Oil

Brent crude was broadly unchanged over the last week at $56 per barrel but this is still close to its highest level since July 2015. Overall, the oil market has taken a positive view on OPEC’s November deal to cut production both internally with OPEC members and externally with non-OPEC nations including Russia. This deal seems to be holding.

Commodities – Gold

Gold was strong last week, up $21 to $1,256, the highest since just after the US election. Gold has been helped by the 2017 weaker dollar. Why is this? Gold is priced in US Dollars. For gold to maintain its intrinsic worth or real value i.e. to be worth no more or less the next day than today all other things being equal, if the dollar rises the gold price will fall and vice versa. If the gold price did not fall when the dollar rose then a physical bar of gold would be worth more than the previous day with no change in the fundamentals around gold.

Equities

S&P 500: 2350

Nasdaq: 5850

FTSE 100: 7250

Bonds – 10 Year Government Yields

US 2.35%

EU 0.20%

GB 1.10%

Foreign Exchange 

EUR/USD  1.0600 (1 euro buys 1.0600 dollars)

GBP/USD  1.2500 (1 pound buys 1.2500 dollars)

Commodities

OIL: Brent: 56.00 (dollars per barrel)

GOLD: 1250 (dollars per ounce)

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About Paul McCormick

Paul McCormick is the founder of Opening City Doors and is a Financial Market Specialist having worked for several leading Investment Banks and financial technology institutions additionally.He therefore provides a unique insight, and unusually broad perspective, into the opportunities available in London Financial Markets and related sectors and how to launch your career in the ‘City’.