US
Trump’s surprise victory in the U.S. presidential election in November has driven investors out of bonds and into equities, accelerating a massive flow of funds that some investors say may last for years and spell the end of the multi-decade rally in bonds. The value of global equities climbed to $68 trillion from about $65 trillion the day before the election. Bonds have lost about $2 trillion in that time. Investors have driven U.S. stock markets to record highs in expectation of fiscal stimulus from the Trump administration.
Financial market observers and investors are split about the continuation of that trend, sometimes named the “great rotation” from bonds to stocks. It is possible bond prices may rebound (yields fall) because growth will probably continue at a slow pace as it will take considerable time for Trump policies to be reflected in stronger economic data. Indeed, US bond yields have fallen over the last month (see below). Bonds may also benefit from the uncertainty around Brexit, and elections in Europe and even the risk of a US trade war with China. Remember equities do well in a ‘risk on’ environment and bonds do well as a ‘safe haven’ investment when global events unsettle investors. (Gold is another safe haven investment having been around as a commodity of value for 5,000 years).
UK
Last week the FTSE 100 recorded 12 daily rises in a row; an unprecedented event, recording daily record highs in the process and smashing through the 7,300 barrier for the first time in its 33-year history when the index began life at 1,000. It finishing the week at 7,337.81
The index has benefitted from the global surge in equities but specifically, the FTSE index tends to make gains when sterling drops, as a large number of its constituent companies have large dollar global revenue streams. Since the Brexit vote last June, the severe slump in Sterling has boosted these multinational–companies lifting the index 14.4 pc last year.
Foreign Exchange
GBP:The pound’s torrid run has continued this year becoming the worst performing currency in the G10 falling to a 10 week-low of $1.2125 against the dollar on the belief Theresa May will pursue a ‘hard Brexit’ path with the UK not participated in the ‘single European economic market’ and negotiating its own trade deals accordingly.
USD:The dollar was weaker last week (by just under 1% versus a basket of other currencies) and is in fact down for three straight weeks after surging following the election. However, this move is seen as profit-taking by investors rather than a fundamental shift. Interest rates (the ‘Fed Funds’ rate) will likely rise by 2 or 3 quarter point rises in 2017 which will underpin the US currency.
Fixed Income
As Investors have rotated out of bonds into stocks since the US election on the prospect of stronger US, and therefore global, economic growth, higher inflation and higher interest rates, yields have surged with the 10-year US Treasury bond (for example) rising from 1.80% (yield-to-maturity) to 2.40% (a rise of “60 basis points” in market terminology). However, two important factors: Firstly, yields have risen much more than this, in fact by over 100 basis points (1%) since the low 10-year yield of 1.32 last July involving drastic bond price falls. Secondly, bond markets have actually recovered over the last month with 10-year US yields falling 20 basis points as investors want to see evidence of post election reinvigorated US economic growth after all the ‘noise’ and the promise from Trump’s new policies of lower personal and corporate taxes, increased infrastructure spending and deregulation (especially of banks).
Commodities
OIL:Last week oil posted the biggest weekly decline since November as traders await proof that OPEC and other producers are following through on promises to cut production. Oil has advanced since the deal among members of the Organization of Petroleum Exporting Countries and 11 other nations to temper global supply. It has been unable to sustain its rally above $55 amid concern that rising prices will spur more production. The OPEC supply deal has only been in effect for two weeks.
It is believed that the caps on supply, together with rising demand and natural decreases in output in some countries, will help balance the market and support prices.
Equities
S&P 500: 2270
Nasdaq: 5570
FTSE 100: 7330
Bonds – 10 Year Government Yields
US 2.40%
EU 0.30%
GB 1.35%
Foreign Exchange
EUR/USD 1.0600 (1 euro buys 1.0600 dollars)
GBP/USD 1.2100 (1 pound buys 1.2100 dollars)
Commodities
OIL: Brent: 55.00 (dollars per barrel)
GOLD: 1190 (dollars per ounce)
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