Market Commentary – 8th February 2017
A Weak of Strong Economic Data and more Trumpeting!
Over the last week, we have seen markets rise as we have seen positive economic data, and again plenty of outlandish comments and rhetoric from President Trump. Although he is having further internal issues with his immigration policies, Trump has continued his Trumpeting, internationally this time, by claiming the European Central Bank are currency manipulators and that Germany is a currency exploiter, using a weak euro to boost its exports to the detriment of the US and the rest of the Eurozone. ECB president Mario Draghi rebutted the claims arguing that the ECB’s monetary policies reflect the diverse positions in the economic cycle throughout the Eurozone. Germany is powering ahead, with other Eurozone countries lagging somewhat.
Looking to domestic European issues, Draghi also said that the “euro is irreversible” when asked by MEPs if a country could leave the currency bloc, as Marine Le Pen has announced she would do if she won the presidential election in France. Following the vote for Brexit, the populist movement in France has gained some traction and with elections around the corner, Draghi and the EU are keen to hold a strong line to keep the EU and currency bloc together.
In the UK MPs voted overwhelmingly in favour of Theresa May triggering Article 50, meaning the Prime Minister is on track to begin Brexit negotiations with Brussels in mid-March. MPs are due to vote on final amendments to the Article 50 bill tonight, before then being debated in the House of Lords later this month. Despite the political noise, we welcome the continued positive global economic outlook and will continue to play the reflation trade whilst it offers reward.
Global Economic News
Over the past week, we have continued to see positive economic data. For the UK, the February Inflation Report, saw the Bank of England adopt a more positive tone on the economy’s prospects. GDP growth this year is now expected at a well-above consensus 2%, while inflation and unemployment are forecast to run at lower rates than were predicted last November. The MPC continues to expect a marked acceleration in inflation off the back of the weaker pound. A big difference to the 0.6% that was forecast in the summer last year and 1.4% in November. If they continue to get it so wrong the credibility of Mark Carney and the BOE will come into question.
In Europe, manufacturing PMI for January was 55.2, a notch above the 55.1 reported in last week’s flash estimate. This is the highest level in 69 months and suggests that the strong momentum seen in the manufacturing sector in Q4 2016 has carried into this year. All the main Eurozone countries continued to show strong manufacturing numbers, led by Germany and Spain. The figures reflect increased optimism about the capacity to withstand negative shocks, but also provide further evidence that price pressures are building rapidly. Mario Draghi, President of the ECB, rebuffed these claims by stating that that recent pick-ups in inflation were driven by energy prices while underlying inflation pressures remain subdued, and confirmed that the central bank is prepared to expand its record stimulus programme if the inflation outlook becomes less favourable.
In the US, the ISM Manufacturing Index rose 1.5 points to 56.0 in January, beating consensus expectations of 55.0, and increasing the pace of expansion for a fifth month in a row. Non-farm payrolls powered ahead in January with 227,000 jobs added, against a consensus forecast of 175,000. The unemployment rate is sitting at 4.8%. At the FOMC meeting, the target range for the Fed Funds Rate remained unchanged at 0.5%-0.75%. Members more confidently forecast that inflation will rise to 2% over the medium term, increasing the likelihood of interest rate rises later this year.
Overall, the economic data coming through offers support for reflation continuing and for risk to be rewarded in the markets, accepting comments from politicians that causes noise is likely to change sentiment on a day to day basis.
As we are constantly looking at Economic data and have set several Barometers that test the outlook, and to give our readers some consistency, we have selected the following six barometers that we will review weekly as detailed below: –
US Earnings – As of 3 February, (with 55% of the companies in the S&P 500 reporting actual results for Q4 2016), 65% of S&P 500 companies have beat the mean EPS estimate and 52% of S&P 500 companies have beat the mean sales estimate. As or the earnings, the blended earnings growth rate for the S&P 500 is 4.6%. The fourth quarter will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015.
UK & Non-UK Gilt Yields; Over the last week we have seen bond yields edging downwards, with 10 Year UK Treasuries yields falling by around 0.17%. There was a similar trend in US Treasuries and with Eurozone Government bond yields also falling, but to a lesser extent. This short term move was a surprise and the trend is still for yields to rise and valuations to fall, especially as the economic data is pointing to an improving global economic situation, we see a further strengthening of bond yields and a corresponding fall in valuations as being the trend. As you can see volatility is still high in assets that should not be functioning like this, which is a further example of why the assets should not be invested into.
GBP to USD/Euro/JPY; Sterling has fallen from 1.27 and is now back narrowly within the expected range and reached a two-week low against the dollar earlier this week. Sterling dropped to 1.25 against the dollar following the publication of the Inflation Report and minutes, suggesting that investors expected something different with regards to interest rate guidance. The probability of a rate hike at some point during 2017 was sitting close to 50% prior to the MPC’s February meeting. But the Committee’s relatively balanced tone shocked markets to the extent that the implied probability of a 2017 rate hike is now just 34%. In addition, positive US economic data has helped strengthen the dollar. Comments from Philadelphia Fed President, Patrick Harker, stating he would support hiking rates in March has raised the prospect of the Fed tightening interest rates quicker than previously thought. We still expect to see further sterling weakness and daily fluctuations in sterling continue to remain high.
- GBP / USD – Range 1.25 – 1.10 – Today 1.25
- GBP / EUR – Range 1.20 – 1.10 – Today 1.17
- GBP / JPY – Range 1.50 – 1.25 – Today 140
Oil Price; Oil is down slightly on the week and is trading at $52 for WTI Crude and $55 for Brent. This masks the rise earlier in the week and then subsequent fall back, pressured by sluggish demand and evidence of a burgeoning revival in US shale production that could complicate efforts by OPEC and other producers to reduce the supply glut. Over the month, prices are down by around 1%. Oil is still trading within our expected range of $50-60 / barrel. Gold Price; Gold has ticked up over the last week to $1,239 / troy ounce, mainly arising from Mr Trump’s protectionist comments and actions inducing some uncertainty in the markets. Gold has rebounded from its December lows of $1,130 / Oz, but noting this is off the back of a fall from $1,350 in September 2016. Despite this, gold is range-bound for now. We do not expect much in the way of price movement and although it is a good diversifier, unless we see risks of a soft Brexit decrease and sterling fall, there is no gain to be made accepting it is a safe asset. We are certainly not seeing any indicators of a risk off period, which is the purpose of this barometer.
Model Portfolios & Indices
Over the week, we have seen almost all major developed market indices advancing. US and UK indices rebounded strongly from the declines in the week previous. In the UK, the FTSE 250, which is the barometer for UK mid-cap companies, powered on to a new high and the FTSE 100, which is sterling sensitive due to international revenues, was buoyed by a fall back in the sterling / dollar exchange rate. Off the back of this the model portfolios have all advanced strongly, with good contributions coming from global equities and exposure to UK mid-caps. Returns to date continue to be positive across all the time horizons. The portfolios are well positioned to benefit from the continued reflation trade and long may it continue. We will continue to monitor the economic data and should things change that require our action, we will step in to act in your interests.
This day in History
On this day in 1971, the Nasdaq Composite index debuted with 50 companies and a starting value of 100. Today the index value is above 5,600 and contains more than 3,000 securities, significantly more than most stock market indices. As always have a great week and we will continue to watch and evaluate and if anything changes we will let you know.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager