Graduate Market Update

Equities

US:The Dow Jones Industrial Average pushed through the 20,000 level for the first time as Trump started to make his first moves as US president on infrastructure and deregulation which have reignited investors’ confidence in the US economy propelling US stock markets into record territory.Investors have poured money into banks and other cyclical companies on the hoped that a mix of tax cuts and fiscal stimulus from Trump will accelerate growth and inflation.

After a strong post-election rally late last year, the Dow spent more than a month just below the 20,000 level as investors waited for clarity on Mr Trump’s policies.Nonetheless the Dow has surged nearly 9% since Mr Trump’s November victory. Banks particularly are up sharply since the election – Goldman Sachs is up 30%.Industrial firms and pharmaceutical stocks also strong.

However, it is worth noting that the S&P 500 index is far more important to investors since it captures a broader cross-section of corporate America. It has trailed the Dow’s gains rising 6.6% per cent since election day.Nasdaq, the 3rd major US stock index and principally focussed on technology companies, is up 8.8% in the same period.

UK: The economy has remained buoyant since June’s Brexit vote, confounding the Bank of England’s predictions. The latter is expected to increase its forecasts for growth and inflation, feeding speculation it will be forced to raise interest rates from the current post-Brexit ‘emergency’ 0.25% sometime this year.

The FTSE 100 index (comprising of many large international companies that benefit from a weaker UK currency as the latter increases overseas profits when translated back into GBP) is currently trading just below 7,200 and close to its all-time high of 7,337 on January 13th.

Fixed Income

There is a lot of talk about the great rotation out of bonds into equities. Many bond markets offered double digit (i.e. 10%, 11%) yields 30 years ago and yields hit rock bottom last summer with many European government bonds offering negative yields to maturity. Since the low yields of last summer many bond yields have risen 1% or 100 ‘basis points’ resulting in severe bond price falls.

Yields rose further last week as US equities where in favour once again. When stocks do well bonds often do not. The yield on the benchmark 10 year US Treasury bond rose once again above 2.50%-it was 1.32% last July!10-year German government bonds or ‘Bunds’ now yield just under 0.50% annual yield-to-maturity having traded at minus 0.20% last July. Investors fear inflation which erodes the real value of bonds.

Foreign Exchange

The US dollar has been strong over the last several months further boosted by Trumps expansionary fiscal policies which is likely to lead to stronger economic growth, higher inflation and higher interest rates. The dollar index, which measures the US currency against a basket of its peers, hit a 14-year high of 103.82 at the start of the year, but dipped below 100 this week as investors appeared wary that Mr.Trump’s protectionist stance could harm the US economy.        

Commodities

Gold: Gold does not do well when risk assets such as equities are in favour as gold is regarded as a ‘safe-haven’ investment so its price is down since the US stock market started its post-election rally.  But gold has performed well during January as Trump’s expansionary policies are seen as inflationary and the ‘yellow metal’ is also seen as a store of real value i.e. its value cannot be eroded by inflation unlike a bond. Gold has physical worth and is an inflation protection-type of investment.

Oil: Generally optimism has returned to the oil market since the OPEC production cartel (led by Saudi Arabia) struck a deal last month with some non-OPEC nations to curb output. The supply cut, the first by OPEC and non-OPEC nations for 16 years, has helped stabilise the price of oil above $50 a barrel after a two-year downturn. In 2014 oil was $100 per barrel. 

 

Equities

S&P 500: 2300

Nasdaq: 5650

FTSE 100: 7200

Bonds – 10 Year Government Yields

US 2.53%

EU 0.50%

GB 1.50%

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: 55.00 (dollars per barrel)

GOLD: 1190 (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’.