US
Since March 14 2017 the yield on the global benchmark US 10-year Treasury bond has defied expectations and fallen from 2.60% to 2.14% which means bond prices have risen strongly (remember yields & prices have an inverse relationship). Most financial commentators had expected yields to rise along with interest rates in a robust US economy during 2017. Similarly over this period the US Dollar index has fallen from 101.7 to 96.6 against expectations.
Reason: Investors are growing disenchanted with Donald Trump’s administration and sceptical that it will nurture an economic bounce via pro-growth reforms. Much still depends on whether lower personal and corporate taxes can be achieved. Trump’s momentum has stalled both with his failure to get proposed healthcare reforms (Obamacare repeal) through Congress and with the scandal over his campaign ties to Russia.
There is something of an investment paradox in that bonds are doing well as investors begin to doubt Trump inspired economic growth and US equity markets (S&P 500, Dow Jones Industrial Average and the NASDAQ) are all trading at record levels.
UK
After the June 8th election, Sterling fell the most in eight months as the election intended to strengthen Prime Minister Theresa May’s hand in negotiations with the European Union instead left her battling to survive. The currency’s retreat gave British stocks a boost, as the FTSE 100 Index gained around 1 percent. Overall, however, the ‘hung parliament’ has had a muted effect on UK markets despite Brexit concerns. The latter meant that UK markets were already expecting an extended period of political uncertainty.
Europe
The single currency came under modest pressure on Thursday after the outcome of a policy meeting of the European Central Bank was widely viewed by market participants as dovish. The central bank dropped its easing bias on interest rates and said that it now judged the risks to the Eurozone economy to be “broadly balanced”. However, market sentiment towards the Eurozone economy remains broadly positive.
Commodities
Gold: The price of gold is again approaching $1,300 per ounce and flirting with its most expensive level since Donald Trump’s election victory in November. A falling dollar and dwindling bond yields (bonds are an alternative investment medium) alongside heightened geopolitical tensions are all deemed supportive of bullion.
Oil: Having failed to crush the US shale industry through a policy of excessive oil production to force higher US Shale producers out of the market, Saudi Arabia and its allies are now looking for co-existence with other global producers instead. OPEC, led by Saudi Arabia, has just agree to extend the historic deal hammered out last November between the world’s largest oil producers, who pledged to curb crude production by 1.8 million barrels a day, until early 2018.The Algiers Accord was the first between OPEC and non-OPEC countries in 15 years, and included co-operation from Russia.
OPEC is a cartel made up of 14 of the largest producing nations.Together, they control more than 80 pc of the world’s largest proven oil reserves and supply almost half of the global crude production.
Misc – Global Quantitative Easing
US: At its meeting next week the US Federal Reserve is expected to announce a blueprint for shrinking its supersize $4.4 Trillion balance sheet i.e. how they will let go of its holdings of Treasury and mortgage-backed securities that it bought as a result of the financial crisis and associated Quantitative Easing. QE was obviously extremely supportive of asset prices (equities, bonds and more) as liquidity was pumped into the market. A reversal of this process drains liquidity from the market and is therefore not supportive of asset prices. So any announcements on how the Federal Reserve is going to manage this process over the coming months and years is significant.
Europe: In a somewhat similar vein European policymakers face a challenge to wind down their bond buying stimulus programme. This is called ‘tapering’ and the market does not like to hear this word. The markets have grown accustomed to a reliable and influential buyer of debt i.e. the ECB. Indeed, Eurozone authorities have accumulated EUR 1.8 Trillion of sovereign debt, asset-backed securities and various bonds issued by banks and companies, and they add EUR 60 Billion to the hoard every month. Goldman Sachs expects the ECB to make an announcement in October or December that will mean European QE will not exist in 2018. Goldman also estimates that European government bonds e.g. German ‘Bunds’ are 60 basis points (0.60%) lower in yield than they would be should QE not exist. It looks like European bond yields will therefore rise going into next year – a move compounded with a rebounding European economy.
Equities
S&P 500: 2440
Nasdaq: 6300
FTSE 100: 7525
Bonds – 10 Year Government Yields
US 2.20%
EU 0.30%
GB 1.05%
Foreign Exchange
EUR/USD 1.1200 (1 euro buys 1.1200 dollars)
GBP/USD 1.2750 (1 pound buys 1.2750 dollars)
Commodities
OIL: Brent: 49.00 (dollars per barrel)
GOLD: 1275 (dollars per ounce)
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