Markets, News, Views, Commentaries (Jan 2017)

While financial markets trade pretty quietly over the holiday period, there was plenty of action on the global political front.

Contrary to pre-US Election predictions, US (and global) financial markets continued to be driven through December by the Presidential election victory for Donald Trump in early November. As the US Dow cracked 20,000 points for the first time**, financial markets focused on the stimulatory policies expected under President Trump, including significant company and income tax cuts, increased infrastructure spending and reduced regulation. The more controversial policies around trade, immigration and climate change look to be considered secondary factors at this stage.  However in the past few days we’ve seen markets come off a little – whether that is a simply a breather after a good run or a realisation by markets that that it may not all be full-steam ahead remains to be seen.

**AMP’s Shane Oliver notes in his most recent update that “not too much should be read into the Dow crossing 20,000. Yes it creates a bit of short term excitement (like crossing from Victoria into NSW) and generates some headlines but it’s really just an arbitrary number for an index which only has 30 companies that are combined using a ridiculous price weighting system (so that Goldman Sachs gets a bigger weight than GE). And there is no evidence of higher than average returns after each 1000 point level has been crossed on the Dow anyway”.

Other than this, there were a few notable events over the break:

  • Australian GDP growth showed a surprising -0.5% figure for Q3 2016, well down from +0.6% for Q2 2016. This was only the fourth quarterly negative print in the last 25 years and took the annual rate of growth down sharply to 1.8% pa from 3.1% pa.
  • In December came the US Federal Reserve’s decision to raise interest rates by 0.25% to a range of 0.5% to 0.75%. This was only the second rate hike in 10 years. The Fed also increased their forecast for future rate increases with three rate hikes now expected for 2017 (as opposed to two).

As a result, many analysts and economists have made some major changes to their expectations for the Fed Funds rate, mainly to reflect the expansionary, stimulatory and (ultimately) inflationary policies of the Trump administration.

For example, Colonial First State’s chief economist reported that “given that we now expect the US economy to experience a significant easing of fiscal policy from late 2017 onwards, which pushes inflation higher than previously expected and brings forth the need for more tightening from the Fed, we now expect two rate hikes in 2017 followed by three hikes in 2018 and three more in 2019. CFS now expect, however, two rate cuts in 2020 as the tightening of financial conditions over 2018-2019 (from a higher USD, higher bond yields and a higher Fed Funds rate), combines with President Trump’s anti-trade and anti-immigration policies to bring about an economic downturn.”

In European politics, the focus in December was on the failed referendum in Italy that was designed to make it easier for the government to implement (much needed) economic reforms. The failure of the referendum saw Prime Minister Renzi resign.  And the Brits continue to work through the process of exiting the Eurozone.

Europe has an interesting 2017 ahead with elections in Germany, France and The Netherlands.  Support for the populist/ nationalist parties in these parties seems to be strengthening and it will be interesting to see what happens. (See link below to related story).

Billionaires:   and finally, it was reported over the break that the world’s 8 wealthiest people are as wealthy as the poorest half of the world’s entire population.

The chart below compares the individual billionaire against similarly sized countries.

Sources:  Morningstar research; Colonial Update for December 2016; RBA, Bloomberg,YieldReport, Knoema.