3 dominant factors held sway over investment markets this week: the US Federal Reserve Open Market Committee meeting, with markets already pricing in a rate rise of 0.25%, but more significantly, looking for a steer on the future path of rate rises; the Dutch general election, not as significant to markets in itself, but acts as a gauge as to the rise in popularity of populist political parties ahead of the upcoming French presidential election; and the oil price which fell 8% last week on concerns that OPEC’s (Organisation of the Petroleum Exporting Countries) supply restrictions are being swamped by the effect of US tight oil coming back on stream.
The US interest rate rise of 0.25% this week was almost a foregone conclusion after the US non-farm payrolls last week came in ahead of expectations, having added 235,000 new jobs, with annual wage inflation having risen to 2.8%. However, of greater significance was the Federal Reserve’s steer on the path of future rate rises. The Fed’s “dot plot” showed no change from the end of December’s meeting, signalling a total of 3 rate increases this year as the Fed continues to show a cautious approach to rate normalisation whilst President Trump has yet to unveil any policies designed to stimulate the US economy. The US dollar fell, as markets had become overly convinced that the Fed was going to turn increasingly hawkish. US Treasuries rallied, with the yield on the 10-year falling 10bps to 2.5% and US equities rallied, rising 0.8% on the day. US inflation showed signs of easing off, as headline Consumer Price Index (CPI) rose 0.1% in February, substantially lower than January’s 0.6% increase. However, on a year-on-year basis, this takes headline CPI to 2.7%, the largest increase since March 2012. Growth in US retail sales continued to show signs of slowing, with February’s number rising by 0.1%, the lowest growth rate in 6 months and the 3rd straight month of cooling. The S&P 500 rose 0.37% over the week to the close on Thursday, whilst the Dollar index fell 1.5%.
In a week of little news, the Japanese Topix index fell 0.5%, impacted by the Yen strengthening versus the dollar, rising from Y115.4 to Y113.1 versus the dollar, undermining the international competitiveness of Japanese companies.
Whilst the outcome of the Dutch election was in itself not so significant for financial markets, the read across to the outcome of the upcoming French presidential election was huge. There has been a lot of interest as to the success of the Freedom Party (VVD) of Geert Wilders, which has been campaigning on a ticket of anti-immigration and the Netherlands leaving the EU. In the event Mark Rutte, the incumbent prime minister, triumphed, with a relatively disappointing showing for the VVD. This was taken very positively by markets with both the Euro and European equities rallying on the back of the result. In recent weeks investors have become increasingly concerned about the prospect of Marine Le Pen, of the National Front, winning the French presidential election, despite the seemingly high mountain she has to climb under the French electoral system. The Dutch result has, at least for the moment, provided some relief to worried investors. Over the week the Eurostoxx 50 rose 1.75%, whilst the Euro rallied by just over 1% versus the US dollar.
The oil price took another lurch down on Tuesday, having fallen by 8% the previous week over concerns that US tight oil supply is coming back on stream more rapidly than previous expectations, in response to the modest recovery in the oil price. Brent crude briefly touched $50.30, a 10% fall over the past week, as OPEC’s monthly report showed that Saudi production had increased in February, despite the Saudi’s having led OPEC’s recent agreement to limit oil supplies in an effort to stabilise prices. A combination of a statement from Saudi Arabi asserting their commitment to “stabilising the global oil market” and a report from the Energy Information Administration showing that total US crude oil stocks declined last week for the first time this year, helped oil to modestly recover, with Brent trading at $51.9 at the time of writing.
The Australian dollar was a big beneficiary from the less hawkish rhetoric from the US Federal Reserve, jumping just over 2% this week, despite the unemployment rate rising to a 13-month high of 5.9%. Strengthening commodity prices on the back of a weakening dollar helped the equity market rise 0.4% over the week.
As a likely precursor of what is to come after the triggering of Article 50 to leave the EU, sterling had a bit of a rollercoaster
week. Nicola Sturgeon of the Scottish National Party demanded that Scotland be given a new independence referendum from the United Kingdom as a majority of Scots had voted to remain within the European Union. This led sterling to weaken to its lowest point since mid-January, touching $1.212 to the pound. Following the latest Bank of England interest rate setting committee, the pound recovered to $1.236 despite rates being kept on hold, as one of the external members of the Monetary Policy Committee, Kristin Forbes, voted to raise rates, the first sign of dissent in 8 months. The FTSE All Share over the week rose 1% up to 12pm London time on Friday.
Elsewhere, the MSCI Emerging markets index rose 2.7%, benefitting from a strengthening US economy coupled with a
weakening US dollar and rising metals prices.
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