Market Bulletin (20/12/2016)
The odd couple
Janet Yellen was born in 1946 in Brooklyn, New York, just two months after Donald Trump, whose first encounter with the world came in the neighbouring borough of Queens. As of 20 January, the two New Yorkers will be closer still – the Fed is only ten minutes’ walk from the White House. The relationship between the White House and the Federal Reserve should be uncomplicated, recognising the presidency’s electoral mandate and the Fed’s institutional independence. Already, there are reasons to think it could become more fraught.
Last week it was Janet Yellen who stole the show, at least on markets. The Fed’s decision to raise US interest rates by a quarter of a percentage point came as no surprise, but investors were more interested in the ‘dot plot’ – the Fed’s rates forecast for 2017. In the event, Janet Yellen spoke in glowing terms of the US economy and unemployment figures, and predicted three rate rises next year. Markets had expected just two and were quick to respond. The yield on the 10-year US Treasury, the world’s most important bond, reached almost 2.6%, not far off double its 2016 low. Since the 10-year government bond yield creates a floor for the wider US bond market, many US companies have seen their corporate borrowing costs rise significantly in recent months.
The sense of entering new economic and financial territory was echoed in Donald Trump’s appointments last week, as he named Rex Tillerson, Chief Executive of ExxonMobil, as his choice for Secretary of State – the US’s de facto foreign secretary. Tillerson has a close relationship with Russia and with President Putin, facts that appear even more sensitive in light of last week’s official US confirmation that Russian hackers with links to Putin had tampered with the US election process.
Trump brushed off claims that tampering had taken place, but he also received implied pressure from Janet Yellen, who he had criticised during campaigning for not raising interest rates sooner. In her interest rate statement on Wednesday (and without mentioning Trump by name) she warned against the value of one of his signature policies: fiscal stimulus.
“The degree of slack is diminished [in labour markets],” said Yellen, referring to the fact that US unemployment is now at a nine-year low of 4.6%. “Fiscal stimulus is not needed to help us get back to full employment.”
Yellen’s tone and content alike helped to push the dollar to its highest level since 2003, a fact expected to make Trump’s promise to rebalance trade relations much more difficult to keep. Meanwhile, stocks continued to rise. The S&P 500 was essentially flat, rising just 0.04% but, like the NASDAQ Composite Index and Dow Jones Industrial Average (DJIA), clocked a record high midweek. The DJIA is nearing 20,000 – such breakthroughs tend to be psychologically important.
Indeed, it was a significant week for the sector. The tech giants tend to lean towards the Democrats and to favour globalisation, while comments on the campaign trail (such as on antitrust and outsourcing manufacturing) gave them specific reasons to fear a Trump presidency. But last week the president-elect welcomed lead figures at Amazon, Tesla, Apple, Facebook, Alphabet (Google’s parent company) and Microsoft to Trump Tower in Manhattan and waxed lyrical about the importance of the sector.
Meanwhile, Uber was ordered to remove its self-driving cars from San Francisco roads due to licencing issues, and a billion Yahoo email accounts were hacked. Yahoo offered a password-switch solution, but the planned purchase by Verizon, which would have been large enough to create another tech giant, may now be on the back burner; whereas on Friday, a new tie-up between tech giant Apple and gaming veteran Nintendo launched on the iPhone, in the form of Super Mario Run. In the UK, Amazon announced publicly that two customers in Cambridgeshire, one a farmer, had been testing Amazon’s drone delivery system. A TV and bag of popcorn were among Britain’s first drone-delivered orders.
Decoupling
Brexit planning continued to receive scrutiny, and messages were divergent, often depending on which side of the Channel they emanated from. The EU was reported to be pressing ahead with rule changes that would ‘repatriate’ euro clearing (the intermediation of transactions in euros) to the 27 continuing members of the EU – it is currently centred in London, which oversees the processing of some €573 billion daily. HSBC was reported to be gradually moving a number of jobs to Paris – a city more in favour since the centre-right François Fillon became favourite to win the French presidency in 2017. It emerged on Friday that, in a meeting on 1 December, a group of leading Japanese banks had warned that, without clarity on Brexit within six months, some functions would shift to Continental Europe.
Meanwhile, the UK ambassador to the EU warned that Brexit negotiations are likely to take ten years. The UK chancellor called for a transitional deal to allow for a “smooth” Brexit. David Davis, meanwhile, appeared keen not to rule options out quite yet.
“We have always felt that the government would move closer to a soft Brexit as reality begins to bite,” said Stuart Mitchell of S. W. Mitchell Capital. “That means paying into Europe to gain access to the single market, followed by a very long transitional period. Who knows? Brexit may not happen at all. We presented to the Department for Exiting the EU on Friday about the impact of Brexit on small asset management firms. Our impression is that everything is still completely up in the air, but we are probably inching closer to a soft Brexit with a long transition.”
Yet both manufacturing indices and retail sales held up well, according to figures released last week, and the FTSE 100 rose 0.83%, closing above the 7,000 barrier for the first time since October – it is now up 12% for the year. UK inflation struck a two-year high on rising fuel costs, creating yet another headwind to UK savers; rates offered by banks on savings accounts are already low across the country, and current accounts at the UK’s leading high street banks are facing further cuts in the New Year. The bi-annual Boardroom Bellwether, published last week by the ICSA, showed that three quarters of FTSE-350 company secretaries expect UK economic conditions to worsen in the next 12 months. The pound slid against the dollar.
It did not slide as far as the euro, however. The FTSEurofirst 300 rose 1% over the course of the week, despite recent events in Italy, which saw Moody’s cut the country’s credit rating from neutral to negative. Meanwhile, attention turned to Greece, where Alexis Tsipras offered low-income pensioners a €620 million tax boost just in time for Christmas. In response, eurozone finance ministers froze Greece’s funding programme. Ten-year Greek government bond yields rose to their highest level in three weeks.
Currency correlations
The euro suffered another week of losses against the dollar, which is currently dominating currency markets. Indeed, stock market rallies in other parts of the world are often the result – the Nikkei 225 rose 2.1% last week. There is growing speculation that the euro may fall to parity with the dollar for the first time since the currency was launched in physical form, back in 2002.
The strong dollar comes courtesy of, as much as anyone, Donald Trump; while higher interest rates are of course the work of Janet Yellen. The combination is undoubtedly creating headwinds for financial assets in emerging markets. Emerging Asia has suffered its worst month of outflows since 2013, with $22 billion departing stocks and bonds in November alone, in what ANZ, a leading Australian Bank, labelled a ‘Trump tantrum’. The end of the year in finance has been a tale of two New Yorkers.
It only remains for us to wish all our clients a very enjoyable Christmas break.
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