US Interest Rates
Ten days ago the US FOMC (Federal Open Markets Committee) raised the key ’Fed Funds’ rate by 0.25% to take the new band to 0.75 -1.00%. This move was fully discounted by the market after various ‘Fed’ officials monetary policy comments in the run up to the FOMC meeting. The markets are expecting 2 further 0.25% interest rate rises this year and 3 such rises next year. This fits in with the Federal Reserve desire to ‘normalise’ interest rates rather than still be facilitating emergency level, post financial crisis, low levels of rates.
The market actually interpreted the ‘Fed’ comments after the meeting as ‘dovish’ i.e. softer in nature, with little sign of an aggressive interest rate rising policy. The US Dollar sold off on this accordingly.
US Dollar
Overall the US Dollar has been strong over the last couple of years. The US Dollar Index (a measure of the ‘Greenback’ versus a basket of foreign currencies) hit a 14-year high in January at 103.82. Compare this to a value of only 93.0 last April and, in fact, 80.0 in 2014 i.e. the Dollar has risen 20% since 2014 all based on a relatively strong economic outlook and a rising interest rate environment. However, this Dollar rally has seen profit-taking or a ‘pause for breath’ so far in 2017 falling from January’s 103.82 to 100.00 today.
Equities
US stocks have also paused for breath with the S&P 500, Dow Jones Industrial Average and the NASDAQ all holding 1 or 2 per cent below record levels. Investors are reluctant to take the markets higher after the failure of the Trump administration to secure the passage of the crucial healthcare reforms at the end of last week. This sent a wave of risk aversion rippling through global markets.
Participants fretted about the ability of Mr Trump to enact the rest of his economic agenda – most notably tax cuts and infrastructure spending – on the back of this setback.
However, looking at the bigger picture, the first quarter of 2017 was a good one for global equities rising 6.7% – the strongest quarter since 2013.
Bonds
In such a recent ‘risk-off’ US investment environment, some money has been flowing back into bonds (traditionally viewed as a safer investment). Consequently yields on most bond markets have fallen over the last 10 days (prices therefore up) with the benchmark US 10-year government bond moving from a 2.60% yield-to-maturity to 2.40%.
Bond yields are higher in the US than Europe as the former is witnessing an economic upturn and rising interest rates and the latter is still trying to kick-start economic engines. Subsequently UK 10-year bonds yield 1.13% YTM and German 10-year ‘BUNDS’ yield 0.40% YTM. 2-year German BUNDS are still in demand as a safe-haven asset with lingering concerns over French elections and yield minus 0.75% YTM.
Commodities
Oil has traded reasonably close to $50 per barrel ever since the agreement in November, both internally within OPEC (led by Saudi Arabia) and externally with Russia, to cut production. This agreement seems to be holding and it is possible, should this continue to be the case, that oil moves towards the $60 per barrel level.
It is, however, hard to see oil moving above this threshold as US shale producers (extracting oil and gas from pockets within rock formations) will likely ramp-up production, which they have the production flexibility to do, with oil production costs in the 40-50 dollars per barrel region for shale producers. It is hard to imagine oil breaking out of the $40-60 range anytime soon.
Gold has also remained reasonably steady around $1,250 per ounce. Gold is another ‘safe-haven’ asset as it has been around as a means of investment for 5,000 years and likely will do so for the next 5,000.
UK
A final word on Theresa May triggering ‘Article 50’ this week. This was no surprise, and therefore, had no impact on the markets. However, no doubt UK financial markets will react to every significant development that takes place in this ‘two-year story’. Foreign investors might just wait for the story ending before making major UK capital commitments.
Equities
S&P 500: 2380
Nasdaq: 5890
FTSE 100: 7415
Bonds – 10 Year Government Yields
US 2.40%
EU 0.40%
GB 1.13%
Foreign Exchange
EUR/USD 1.0800 (1 euro buys 1.0700 dollars)
GBP/USD 1.2500 (1 pound buys 1.2400 dollars)
Commodities
OIL: Brent: 51.00 (dollars per barrel)
GOLD: 1250 (dollars per ounce)
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