Markets 1st October 2017

Rate rises and tax cuts

It has been a mixed week for markets, as expectations of a further US interest rate rise in December firmed following comments from Janet Yellen, the Chairperson of the US Federal Reserve, and expectations for a US tax cut rose somewhat, despite Trump having delivered little since coming into office. The dollar strengthened, government bond yields backed up, gold retreated further from its recent highs, and the US stock market hit an intra-day record, boosted by financial and technology stocks on cautious optimism of faster GDP growth.

As of 12pm London time, the US S&P 500 is up 0.3%, the EuroStoxx 50 is up 1.0%, UK FTSE All Share up 1.0%, whilst Emerging Markets have fallen 2.7% not helped by the strength of the dollar or concerns of a liquidity squeeze with the tapering of US quantitative easing now within sight.

Global news

Angela Merkel wins again, but could there be trouble ahead?

The week began with the news over the weekend of victory for Chancellor Angela Merkel in the German election, with her Christian Democrat Union (CDU) emerging as the largest party, but significantly, with a lower share of the vote. Big strides were made by the right-wing populist party, Alternative for Germany (AfD), winning around 13% of the vote, and the Free Democrats (FDP) about 10.5%. Merkel now faces drawn out and complex negotiations to form a coalition. The ‘Jamaican’ coalition (symbolic colours of the parties represented in the Jamaican flag of black, yellow and green) of the liberal FDP, the conservative CDU and the Greens has been mooted as the most likely outcome. However, the FDP’s political programme is likely to oppose the proposals by France’s President Emmanuel Macron of forging stronger fiscal integration within the Eurozone.

Additionally, the stronger than expected, showing by the populist AfD party, will heighten concerns ahead of an Italian election expected early next year. This has led to some near-term weakness in the Euro, touching $1.1715 versus the US dollar, a 6-week low, although few expect the weakness to persist.

Market drowns out escalation in North Korean rhetoric

The market largely ignored yet a further escalation in rhetoric between President Trump of the US and North Korea after Ri Yong Ho, North Korea’s foreign minister said Pyongyang could target US bombers that were flying around the Korean peninsula, even if not in their air space. Markets preferred to focus on firming expectations of a US rate rise, and having largely discounted the possibility of a tax cut in the US, faster US GDP growth should it be delivered. The reflation trade was back on, even if for only one day. On Wednesday, the S&P 500 hit an all-time intraday high of 2,511.75, but closed at 2,507, just short of the record set on September 20th.Sovereign bond yields remain largely unchanged. In the US, 10-year treasury yields, which moves inversely to bond prices, rose to a peak of 2.27% after Wednesday’s Fed meeting decision. The yield has ended slightly lower at 2.25%. In Europe, the German 10-year bund yield and the UK 10-year gilt finished the period at 0.46% and 1.36% respectively.

Australian dollar weakens again

The Australian S&P / ASX 200 finished marginally higher by 0.2% in what has been a sluggish week. Markets have been quiet with the state of Victoria enjoying a public holiday today, whilst next Monday, several states also enjoy the Labour day public holiday. The ASX will remain open however. Meanwhile, in economic news, Australian private sector credit grew by 0.5% over the month and rose from 5.4% to 5.5% on a year by year basis. Business credit rose 4.5% over the year, a 7-month high.

New Zealand succumbs to populism despite a booming economy

Populism reached New Zealand this week, with an inconclusive general election result requiring a coalition government to be formed. The anti-immigration New Zealand First party, having won 9 seats, is now in the position of powerbroker, with either the incumbent National party, or the opposition Labour party. Populism has made ground despite New Zealand’s booming economy that has been heavily reliant on immigration.

Carney still talking up interest rate expectations despite revised down growth

On Friday, UK growth statistics were revised down for year-on-year growth to the end of the second quarter from 1.7% to 1.5%. This is the weakest level since the first quarter 2013. Despite this, Mark Carney, Governor of the Bank of England, was still talking up the chances of an interest rate rise

Sterling weakened versus the US dollar to $1.339, and fell against the Euro back down to €1.134 having broken decisively above €1.14 earlier in the week.

Commodities

Gold continues to retreat whilst oil stages a recovery

Firming US rate expectations led to Gold selling off further from its recent highs, now trading at $1,290 an ounce, having hit a peak for the current year of $1,351 towards the beginning of the month. Nonetheless, it remains almost 11% higher year to date.

Oil on the other hand got off to a very strong start to the week, with Brent touching a 26-month high of $59.5 and US West Texas Intermediate (WTI) $52.8 on worries about supply disruption after Turkey threatened to shut Kurdish crude shipments through its territory. Brent is currently trading at $57.2 and WTI $51.4 a barrel.