US Equities: The Dow Jones Industrial Index broke above 24,000 for the first time as global equities enjoyed a 13th straight month of gains. A delivery of tax reform (reducing the corporate tax rate from 35% to 20%) will be important to continue the ‘bull’ market with market risk of
- Tax reform failure
- Higher interest rates
- Higher inflation (which has remained below the Federal Reserve 2% target for all of 2017)
The Federal Reserve chairperson Janet Yellon steps down from office in February. The market expects the incoming chair Jay Powell to continue with the existing agenda – raising interest rates gradually and reducing the balance sheet. Morgan Stanley expects 3 quarter point rises in the ‘Fed Funds’ rate next year (from 1% to 1.75%). To put into context, the average Fed Funds rate for the last 40 years is 5.95%.
US Dollar fell 1.5% in November – its first monthly loss since August. Generally the dollar has been weak this year as US interest rate rises have been below the size and pace expected at the beginning of the year.
US Bonds: The 10-year US Treasury (Government) bond yields remains where it was at the beginning of the year, around 2.40%. At the beginning of the year most forecasters were predicting significantly higher yields along with higher US interest rates.
EUROPE: Loans to businesses across the Eurozone increased at their fastest rate since the financial crisis in October, underscoring the recovery in demand across the bloc as the European Central Bank prepares to scale back its stimulus programme.
December is the last month in which the ECB will buy EUR 60 Billion of bonds; from January, its purchases will halve. Bond yields fell and prices rallied this autumn after the ECB announced it was extending its quantitative easing programme to September 2018.
With economic and consumer confidence high in Europe, European stock markets are buoyant, the Euro is strong and the ECB, like the US Federal Reserve, is looking to shift to a ‘normalisation’ of monetary policy i.e. higher interest rates rather than an emergency (low) financial crisis inspired level.
UK: Sterling breached $1.35 for the first time since late September amid renewed optimism over Brexit talks after reports that the UK was planning to honour its financial commitments to the EU, heightening the chances of a two year transition deal.
Sterling strength saw the FTSE index have its second weakest month of 2017 as the Sterling rise weighed on the many global FTSE 100 companies that receive the majority of their revenues in overseas currencies i.e. Sterling’s surge translates to lower Sterling profits for such companies.
UK bonds remained subdued with 10-year Gilts yielding only 1.30 % implying the market believes UK interest rates will remain low over the medium term on a Brexit-led weak economic growth scenario.
OIL: OPEC (led by Saudi Arabia) and Russia agreed to extend oil production cuts to the end of 2018 with OPEC members Libya and Nigeria in agreement for the first time. Such oil producers wish to shrink swollen stockpiles and keep prices above $60 per barrel. Saudi Arabia and Russia make up a fifth of global supplies.
The US shale industry has cast a long shadow over OPEC since its rapid growth triggered oil’s collapse from above $100 a barrel in 2014 to lows below $30 a barrel in early 2016, the sector has recovered this year as prices have stabilised.
Opinion: Neil Woodford, the UK’s highest-profile fund manager, has said he believes stock markets around the world are in a “bubble” which when bursts could prove “even bigger and more dangerous” than some of the worst market crashes in history.
He cites so many “red lights flashing” e.g.
- Bitcoin going through $10,000
- European junk bonds yielding less than US Treasuries
- Historic low levels of volatility
- Triple-leveraged Exchange Traded Funds attracting gigantic inflows
Equities
S&P 500: 2640
Nasdaq: 6850
FTSE 100: 7300
Bonds – 10 Year Government Yields
US 2.35%
EU 0.38
GB 1.30%
Foreign Exchange
EUR/USD 1.1900 (1 euro buys 1.1900 dollars)
GBP/USD 1.3500 (1 pound buys 1.3500 dollars)
Commodities
OIL: Brent: 62.00 (dollars per barrel)
GOLD: 1280 (dollars per ounce)
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