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The week in review by Ari Towli and Nick Stanhope 13-02-17

Article first published on: 02/13/17 09:20:am

Markets and key events


Strengthening jobs growth, weakening wage inflation
The week began with markets mulling over last Friday’s US non-farm payrolls data, with the number of new jobs having been created strongly exceeding expectations. However, this was countered by the annual pace of average earnings having slowed to 2.5%, from 2.8% in December, and the overall level of unemployment unexpectedly rising to 4.8%.

Anti-corruption candidate…. is he corrupt?
This was followed by news that François Fillon, the right wing candidate in France’s upcoming presidential election, is continuing to defy mounting pressure to pull out of the electoral race after revelations about his use of public funds to pay members of his family, despite allegedly not working for him. This led to heightened concerns to the risk of Marie Le Pen’s National Front Party winning the presidential election with a commitment to exit the European Union. Safe haven bond markets rallied, as did Gold, hitting a 3-month high of $1,245 by midweek, and equity markets drifted sideways.


Re-emergence of the reflation trade

The mood brightened following Donald Trump signalling that tax cutting plans are to be unveiled within the next 2 to 3 weeks, as well as promising the Chinese President, Xi Jinping, that the US would honour the “one China” policy. This raised hopes that the White House might adopt a more pragmatic approach to foreign relations. Markets were further bolstered by positive trade data out of China, released on Friday, that led to a strong end to the week for equity markets, and gold sold off to $1,224 an ounce.

Donald Trump Image

 

Donald Trump's tax cutting plans are to be unveiled within the next 2 to 3 weeks.

Re-emergence of the reflation trade

The mood brightened following Donald Trump signalling that tax cutting plans are to be unveiled within the next 2 to 3 weeks, as well as promising the Chinese President, Xi Jinping, that the US would honour the “one China” policy. This raised hopes that the White House might adopt a more pragmatic approach to foreign relations. Markets were further bolstered by positive trade data out of China, released on Friday, that led to a strong end to the week for equity markets, and gold sold off to $1,224 an ounce.

Equity markets end on a high note with the exception of Europe

As of 12pm London time, the S&P 500 was up 0.45% for the week, reaching a fresh record high, MSCI Emerging Markets rose 0.73%, Shanghai Composite up 1.80%, Australian S&P/ASX 200 up 1.76%, Japanese Topix up 2.08%, FTSE All Share up 1.04% whilst European equities were the laggards, with the Eurostoxx 50 falling 1.53%.

European tensions increase

The bond spread between French and German government bond yields widened at the start of the week by 77 basis points, the largest move for 4 years as investors grew concerned over the increased possibility of Marie Le Pen winning the presidential election. The yield on 10-year French bonds were trading at 1.14% versus 0.37% for equivalent German bunds. This was despite Mario Draghi, president of the European Central Bank, being quoted as saying although the Eurozone recovery is improving and headline inflation picking up, core inflationary pressures, i.e. excluding energy and food, are still only expected to rise gradually. It is for this reason that the ECB’s expansionary monetary policy remains in place and is unlikely to change this side of the European electoral cycle unless policy makers became convinced that inflation is self-sustainable at close to 2%.

Trouble ahead in Greece?

Concerns over Greece are making a comeback as Athens requires a further loan to be agreed by July to avoid bankruptcy. However, the International Monetary Fund has so far refused to sign up without further debt forgiveness from the EU, citing the current arrangements as unsustainable. Germany’s finance minister, Wolfgang Schauble, has also said that the loan programme cannot proceed without the IMF’s involvement, as this is an essential ingredient to sustain political support for the programme in Germany. At the moment, the Europeans are not showing much appetite for debt forgiveness ahead of political elections this year. This led yields on 2-year Greek government bonds to soar above 10% on Tuesday. Authorities are keen to get this issue resolved ahead of the Dutch and French elections so the issue does not become politicised, but so far, the different parties involved are not showing much willingness to compromise.

Positive Chinese data perks up investor spirits

By the end of the week, the reflation trade was back on, supported by positive trade data out of China. Chinese exports were up 7.9% for the year to January, whilst imports jumped 16.7%, bolstering optimism in the health of the world’s second largest economy. The data also showed that China has been buying up commodities at a near record pace. Iron ore prices rose to close to a 3 year high, after imports into China were shown to have jumped 12% in the year to January. This also helped to allay fears of oversupply in crude oil, with Brent jumping up to $56.27 at the time of writing. This is despite data from the Energy Information Administration showing that US inventories had risen for a fifth successive week.

Australian equities benefit from positive Chinese data

The Australian market performed robustly over the week, benefitting from strong commodity data out of China. However, this masked concerns earlier in the week as the Australian dollar fell after the Housing Industry Association revealed new private home sales rose 0.2% in December, having grown over 6% a month earlier. The Central bank also revised down its long term GDP growth forecasts. Shares in BHP Billiton were down earlier in the week on news that workers at the company’s Chilean copper mine, the world’s largest, were preparing for a strike over wages.
Article 50 UK EU Image

 

UK Parliament voted overwhelmingly to begin the formal process of leaving the EU.

No love lost

UK Parliament voted overwhelmingly to begin the formal process of leaving the EU by approving the triggering of Article 50. This led to stories of Diane Abbott, Labour’s shadow home secretary, apparently leaving David Davis, Security of State for Brexit, in no doubt of her complete lack of interest in engaging with him when he leaned in for a jovial embrace in the Stranger’s Bar hours after the vote. Neither party denied the story.

UK data surprises to the upside again

On Friday, the UK released industrial production figures which were at a 6 year high, with the fastest annual growth since January 2011. Industrial production, which accounts for 15% of UK GDP, expanded by 1.1% in December, down from 2.1% in November, but materially ahead of forecasts of only 0.2%. Industrial production for the year to January expanded at 4.3%. However, growth was driven by the volatile pharmaceutical industry. Aside to this, growth was broadly flat over the quarter as a whole.

Changes to the portfolios

We have made no changes this week.

In other news

A sign of things to come?
Trump’s presidency has got off to an awkward start since his travel ban into the United States from 7 Muslim countries (Iran, Sudan, Iraq, Syria, Yemen, Libya and Somalia) had a temporary restraining order issued by a Seattle judge, allowing travel to resume from these countries. On Thursday the 9th, the US Circuit Court of Appeals upheld the judgement, refusing to reinstate the travel ban. Donald Trump has now pledged to take this to the Supreme court for a final decision.
This event may well be a pre cursor to the coming months and suggests that Trump may have a rocky path to getting some of his policies enacted. Despite having won the election, he lost the popular vote and many Americans oppose what he stands for.

Meet the experts

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Ari Towli

Ari has over 19 years’ experience in the area of multi-asset, multi-manager investing.
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Nick Stanhope

Nick has over 13 years of experience in the investment management industry and specialises in the area of multi-asset, multi-manager investing...

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