Market Commentary – 1st March 2017
Politics and sentiment indicators take the forefront this week.
Over the past week, we have seen markets gyrate somewhat, with equity markets pulling back on Friday, before continuing to make ground at the beginning of this week. There has been limited economic data released over the last seven days, with much of it coming from PMI surveys and sentiment indicators, which overall have been positive. This along with comments from the Fed and political headlines have garnered the attention of the markets.
President Trump was in focus this week as he addressed Congress for the first time yesterday. Trump promised the “renewal of the American spirit” along with a proposed $1 trillion of infrastructure spending and “massive tax relief for the middle class”, although he offered little by way of details. Trump, this week, also vowed to increase spending on the defence budget by 10%, raising the Pentagon’s total budget to $603bn. This very much aligns with Trump’s promises to protect US borders and the people of America.
A handful of Federal Reserve officials on Tuesday jolted markets into higher expectations for a March US interest rate rise, with comments that suggested rate-setters are worried about waiting too long in the face of pending economic stimulus from Washington. New York Fed President William Dudley said that the case for tightening monetary policy “has become a lot more compelling” since the election of President Donald Trump and a Republican-controlled Congress. John Williams, president of the San Francisco Fed, said that with the economy at full employment, inflation headed higher, and upside risks from potential tax cuts waiting in the wings, “I personally don’t see any need to delay” raising rates. “In my view, a rate increase is very much on the table for serious consideration at our March meeting.” Many economists are still anticipating two rate rises this year, with the first anticipated in May. Economists at Oxford Economics brought forward their forecast of the next US rate rise from June to May, however, relented from bringing their forecasts forward as early as March.
At the beginning of this week it was reported that Theresa May is preparing for Nicola Sturgeon to call a second Scottish independence referendum. Sturgeon has put forward “compromise proposals” aimed at keeping the country in the single market after Brexit and repeatedly insisted that she is “not bluffing” about her vow to hold a second referendum on Scottish independence if her demands are not met.
Theresa May is expected to watch the House of Lords vote on amending her Brexit bill today, with peers of all parties demanding a firm guarantee for the rights of EU citizens living in the UK. If this happens, we could see the bill being passed back and forth between the two respective Houses. Theresa May will be keen to stick to her March timetable for triggering Article 50.
Global Economic News
In the UK, it has been a relatively light week for economic data. An upward revision to GDP for Q4 2016 saw growth lifted from 0.6% to 0.7%. This was mainly due to upward revisions within the manufacturing industries. Exports rebounded sharply while household expenditure rose at a slower pace and business investment contracted. Year-on-year, the economy expanded 2 percent compared with a 2.2 percent growth previously estimated. Growth for 2016 slowed to 1.8 percent, also below the preliminary reading of 2 percent. UK Manufacturing PMI fell to 54.6 in January of 2017 from 55.9 in the previous month, and below market expectations of 55.6. The reading pointed to the weakest expansion in factory activity since November 2016, as new orders and output rose at a slower pace.
In Europe, the final Eurozone Manufacturing PMI came in at 55.4 in February of 2017 compared to a preliminary estimate of 55.5 but higher than 55.2 reported in January. The reading pointed to the strongest expansion in factory activity since April of 2011 amid strong new business, production, and employment. Companies indicated that domestic demand remained solid in a number of markets, while the weak euro contributed to the fastest growth of new export business for almost six years. Earlier in the week, The Business Climate Indicator for the Euro Area rose to 0.82 points in February 2017 from 0.76 in January and well above market expectations of a 0.79 reading. It was the highest level since June 2011.
In the US, the economic calendar has been reasonably quiet. Existing home sales were stronger than expected in January, increasing 3.3% to 5.69 million, the strongest pace since February of 2007. The pace of home sales in January is impressive considering the increase in mortgage rates that occurred late in 2016, and against the backdrop of inventories that remain quite tight. The Conference Board’s Consumer Confidence Index for February rose 3.2 points to 114.8, an increase that overtakes the post-election bounce in December. Confidence in the present situation strengthened 3.4 points to 138.3 in February, a level not seen since before the financial crisis and credit crunch took hold. Optimism in the present has been buoyed by a consistently strong labour market. Manufacturing PMI and inflation figures will be released later this afternoon from the US.
US Earnings – As of 24th February, (with 92% of the companies in the S&P 500 reporting actual results for Q4 2016), 66% of S&P 500 companies have beaten the mean EPS estimate and 52% of S&P 500 companies have beaten the mean sales estimate. Earnings Growth: For Q4 2016, the blended earnings growth rate for the S&P 500 is 4.9%. 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 and correspondingly valuations rising. This was the common theme across the UK, Europe and the US. The yield spread of French 2 year bonds against German bonds continues to remain wide, amongst the fears of a potential Le Penn victory in the French elections. Whilst this week’s movements are contrary to our view of further strengthening of bond yields and a corresponding fall in valuations, political uncertainty can steer bond yields in the short term. With US rate rises on the horizon, we would expect to see yields rising, accepting that political uncertainty can see a flight to the ‘perceived’ safety of bonds, which would be positive for valuations. Volatility remains high in these assets that should not be functioning like this, which is a further example of why we are still not directionally investing into these assets.
GBP to USD/Euro/JPY;
Sterling has weakened against the dollar over the last week, and is no longer testing the upper end of the expectation range. We have also seen sterling weaken against the euro, falling back to 1.17, and reversing the relative strength that we saw last week against the Euro. As always there is a variety of factors affecting the exchange rates, with sterling opening weaker on Monday, following concerns of a second Scottish independence referendum. A combination of a stronger dollar, arising from comments of Fed officials indicating that a rate rise in March is now “more compelling”, along with PMI numbers for February from the UK which disappointed somewhat. For now, we believe sterling is range bound, with further downside risks associated with Brexit likely to materialise as we progress through triggering Article 50.
- GBP / USD – Range 1.25 – 1.10 – Today 1.23
- GBP / EUR – Range 1.20 – 1.10 – Today 1.17
- GBP / JPY – Range 1.50 – 1.25 – Today 140
Oil is flat on the week and is trading at $54.06 for WTI Crude and $56.62 for Brent. The story is much unchanged with oil. High levels of compliance with OPEC’s agreement to cut output, which is limiting supply on one side of the equation and providing a floor to oil prices, however, US shale oil production is increasing which has an offsetting effect. The supply story, along with stable global demand has provided some much-welcomed price stability in the oil market, even at a significantly lower price by historical standards. Oil is still trading within our expected range of $50-60 / barrel and we do not expect any significant changes in the short term.
Gold is up over the week by approximately $6 / troy ounce and is currently trading at $1,243 / troy ounce. This masks the upwards movement that was seen at the end of last week. Gold reached a 3 and a half month high on Friday, touching $1,260 briefly, as global stock markets fell back and the dollar weakened over concerns about whether Trump’s policies would benefit economic growth. This trend quickly reversed following comments from Fed officials that indicated US rates may rise quicker than the market anticipated. As mentioned previously, further rate rises in the US will likely weigh on gold. 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. Overall, we are not seeing an indication of a risk off stance, which is the purpose of this barometer, however, it was interesting to note that gold functioned as expected on Friday when global stock markets had a bearish movement.
Model Portfolios & Indices As I write, we are seeing the vast majority of indices in Europe, including the UK, advancing. This is on the back of strong Eurozone Manufacturing PMI data. The EuroSTOXX 50 index is up 1.65% so far today, with the CAC 40 in France and the Dax in Germany up 1.6% and 1.4% respectively. The Dax crossed 12,000 for the first time since April 2015. The weaker pound has helped the international focussed FTSE 100 move up 1.1%, to levels that were last seen in mid-January. The FTSE 250 has also hit an intraday high, despite the weaker UK PMI data that was released this morning, with the bullish trend from Europe helping to provide the rally. Today’s positive movements will reflect in portfolio valuations from tomorrow.
US equities have continued to push onwards, reversing the pullback from Friday, with the Dow Jones, S&P 500 and Nasdaq all sitting around the record levels of last week.
Excluding today’s movements, almost all indices that we track were either flat or down slightly for the week. This is reflected in the one week performance of the model portfolios. OBI 5 and 6.5 were up marginally due to their higher non-equity allocation, OBI 8 was virtually unchanged and with the remaining OBI models down marginally. All portfolios have recorded positive performance at each of the reported time horizons with a strong 12-month performance showing through.
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 1998, Titanic became the first film to gross $1 billion, a feat it achieved in only 73 days. James Cameron’s epic account of the sinking of the Titanic had a budget of $200 million and has grossed more than $2 billion to date. Titanic remains the second highest grossing film of all time, behind Avatar, and the fourth highest when adjusting for the effects of inflation from a film’s original year of release. James Cameron also wrote and directed the highest grossing film of all time, Avatar, released in 2009.
Today is also the birth date of a number of famous musicians, stretching from the 19th century to the present day. These include Frédéric Chopin (Polish pianist & composer), Glenn Miller (American trombonist & composer), Roger Daltrey (leading singer and songwriter of the Who) and Justin Bieber (Canadian singer-songwriter & dancer).
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