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Equities

US Equities have hit record highs, having climbed nearly 11% so far this year as Wall Street welcomes a cautious Federal Reserve and the first phase of global economic expansion since the financial crisis a decade ago. It should be noted it is US technology companies including the FAANGs (Facebook, Apple, Amazon, Netflix, Google) that have driven the US rally. After such a strong rally in tech stocks, this sector pulled back at the end of July keeping the overall US equity market in check although still close to record highs.

European equities had a great start to 2017 gaining nearly 10% by mid-May, bolstered by a reduction of political angst following the election of Emmanuel Macron in France. However, the rally has stuttered over the last few months as a rising Euro is seen crimping the continent’s competitiveness. The Euro Stoxx 600, a benchmark for European equities, has since dribbled back about 4 per cent.

However, with European equities looking much better value fundamentally compared to the US, optimism remains high.

Fixed Income

European bond markets globally fear European Central Bank ‘tapering’ – the winding down of a series of extraordinary measures to support EU governments and banks. Policymakers pushed the bank deposit rate to minus 0.4%, Eurozone banks received more than EUR 1 trillion of liquidity via long-term, refinancing operations, and the ECB has purchased more than EUR 2 trillion of government and corporate bonds in a programme that adds EUR 60 billion every month. 

The benchmark 10-year German government bond or ‘BUND’ has risen sharply over the last several months from a negative yield to +0.55% today (this still remains super low by historic standards).

Foreign Exchange

In January the dollar index was at a 14-year high and Trump complained how American companies could not compete internationally with such a strong ‘greenback’. Since then the dollar has dropped 10% automatically making imports more expensive and exports cheaper.

Why is the dollar weakening? It is likely a combination of reasons:

  • The Trump election meant Republican policies of cutting taxes and spending on infrastructure would stimulate the economy, raise interest rates and push the dollar higher. But policy developments have been terrible for the dollar. There is nothing on infrastructure and the failure to do anything about healthcare raises the risk that the Republicans might not even be able to agree on a tax cut.
  • Recent softness in US inflation (below the 2% target) have prompted many to take the view that the Federal Reserve will be unable to proceed with a third rate rise this year – clearly low interest rates are dollar negative.   
  • Looking at economic fundamentals, six months ago the US economy seemed strong while Europe’s appeared in the doldrums. But US core inflation has fallen, and the Eurozone has had a surprising strong recovery. The election of Emmanuel Macron as French president has given the Eurozone a fillip of confidence. Money is pouring into Europe. This in itself facilitates a strong Euro/weak dollar. At the end of July the Euro broke above $1.18 (1 Euro buys $1.18) for the first time since early 2015.How strong the Eurozone recovery is going forward could be a key development of the dollar’s direction from here.
  • Dollar weakness is further compounded by political uncertainty which is back in the form of the enquiry into Russian interference in the election and the president’s desperate efforts to thwart it. The dollar does badly during such scandals.

Commodities

Oil: Promises of more cuts by OPEC members, and oil-major quarterly results pointing to reduced investment in exploration, have spurred an uptick in bullish sentiment for the commodity pushing Brent oil back above $50 per barrel.

Gold: The gold price has an inverse relationship with the US dollar. Since gold is priced in dollars, in order for a bar of gold to be worth the same value in real terms ‘all other things being equal’, the price of the yellow metal must rise and fall with the dollar accordingly. The weak dollar is therefore providing some support to the gold price ($1,265 per ounce).  

Equities

S&P 500: 2470

Nasdaq: 6350

FTSE 100: 7370

Bonds – 10 Year Government Yields

US 2.30%

EU 0.55%

GB 1.30%

Foreign Exchange 

EUR/USD  1.1800 (1 euro buys 1.1800 dollars)

GBP/USD  1.3180 (1 pound buys 1.3180 dollars)

Commodities

OIL: Brent: 52.00 (dollars per barrel)

GOLD: 1265 (dollars per ounce)

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