Positive signs despite geopolitical unrest

16 February 2017

Positive signs despite geopolitical unrest

The euphoria with which markets greeted the election of Donald Trump as US President – largely on the theory that pro-growth policies are pro-growth policies, no matter from whom they come – tailed off a bit in January as the new President was installed, and investors paused to reassess the broader impact of his suite of policy proposals. However, the US markets still ended the month in the black.

The mid-month Presidential inauguration was followed by a flurry of executive orders from the Oval Office, mostly indicating a focus in the administration’s early days on trade and immigration issues. The widespread negative reaction to the immigration order, in particular, unnerved investors and markets gave up some of their gains. After passing through 20,000 points for the first time in its history, the Dow Jones Industrial Average retreated back below that level, closing January with a 0.5% gain.

The broader S&P 500 Index added 1.8% over the month, while the Nasdaq Composite Index posted a 4.3% rise, its biggest monthly gain since July 2016. 

Aside from Trump's inauguration, a key speech by UK Prime Minister Theresa May outlining her Government’s plans for a Brexit also brought a note of wariness to investors mid-month, as did a case challenging the Brexit referendum, which ended in the UK Supreme Court ruling that the British Government could not trigger Article 50 – to instigate Britain’s divorce from the European Union (EU) – without the consent of Parliament. Both houses of the UK Parliament prepared for a February vote on the Government’s Bill to trigger Article 50.

In economic news, US Commerce Department data showed that the US economy continued to expand, with gross domestic product (GDP) growing – albeit somewhat slower – at a 1.9% annual rate in the fourth quarter of 2016. Meanwhile, US Department of Labor figures showed US wage growth accelerating in December at the quickest pace since 2009.

US house price gains maintained momentum in November, two months after regaining the high last seen at the peak of the housing bubble; while consumer confidence data for January slipped from a 15-year high.

One US economic indicator that has definitely seen a Trump effect is the nation’s ‘rig count’, which tallies drilling rigs actively looking for oil and gas. Following the presidential election, and the announcement by the Organisation of the Petroleum Exporting Countries (OPEC) of its first agreement to cut oil output since 2008, the rig count has been galvanised, as the industry expects the new President to follow through on his rhetoric about “freeing up” the shale industry. According to S&P Global Platts, the US rig count for January 2017 was 773, up 9% from December 2016, and up 12% from January 2016. 

Equity markets were also heartened by signs of improving global industrial production and a broadly encouraging corporate earnings outlook. The manufacturing purchasing managers’ index (PMI) surveys released in the first week of January in China, Italy, Spain, Germany, Greece and the US all surprised to the upside – and helped to push the global PMI manufacturing index to its highest level since 2014.

In Europe, signs of an economic recovery in the region gained momentum. Data at the end of the month showed that Eurozone inflation had risen to just below the European Central Bank's target, economic growth was accelerating and unemployment had hit its lowest reading in more than seven years. Eurozone inflation rose to 1.8% a year in January (up from December’ reading of 1.1%) and unemployment fell to 9.6% in December, the lowest rate since May 2009. Eurozone GDP rose by 0.5% in the December quarter. On an annual basis, the Eurozone’s economy grew by 1.8% last year, up from 1.5% in 2015.

The British economy, widely expected to slump after exiting Europe, grew by 0.6% in the December quarter, for a full-year growth rate of 2% – making Britain the fastest growing major economy in 2016.

While the outlook was turning more bullish for European shares, the markets had risen through December and November in anticipation of fiscal stimulus under the new US administration, and in the absence of any indications as to what form this would take, profit-takers stepped in.

The pan-European STOXX 600 Index ended January down 0.4%, with the German DAX gaining 0.5% and the CAC 40 in France slipping 2.3%. London’s FT-100 surrendered 0.6% over the month, with Brexit uncertainty to the fore.

In Asia, the Chinese economy accelerated for the first time in two years in the final quarter of 2016, with China’s GDP growing at an annual pace of 6.8 per cent in the fourth quarter, slightly more than expected, but the slowest pace in 26 years. Growth is being supported by higher government spending and record bank lending – but the latter factor does bring with it concerns about rising debt levels.

China’s industrial production grew 6.1% in December, while retail sales surged by 10.9%, above the 10.7% growth rate that had been expected. Fixed-asset investment rose 8.1% in 2016, less than expected – and the slowest annual pace since 1999 – but consistent with China’s transition to a services-led, domestically oriented economy.

In Japan, the Bank of Japan forecast an era of surging economic growth, predicting that the Japanese economy would grow significantly faster than its long-run trend to March 2019, based on easy monetary policy, government fiscal stimulus and a pick-up in growth overseas.

But late in the month, the resurgent yen undermined the Nikkei Index, as the currency markets saw the Japanese currency as a ‘safe haven’ play. The Nikkei finished January down 0.4%.

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