United States

The Republican tax reform plan unveiled on Wednesday was the biggest driver of US markets this week. The tax reform plan pledges to affect meaningfully American corporations as Trump announced to cut the corporate tax rate from 35% to 20% (though falling short from the 15% he promised during the electoral campaign) and impose a one-off levy on accumulated earnings overseas. This move is beneficial for the stock market because lower taxes would result in higher earnings and measures to prod companies into repatriating cash held overseas could result in much of the cash to be disbursed to investors.

However, the implementation of the ambitious tax reform plan seems complex since in the Republican-controlled Congress there are many deficit hawks, who strongly oppose to unfounded tax cuts as they may result in a swelling budget deficit. Given this element of uncertainty, prediction markets put the chance of corporation tax cuts this year at about 38%.

The announcement of the tax plan seemed to foster the revival in the reflation trade we saw earlier this year following the election of Mr Trump. The S&P 500 closed on Friday at 2,519.36, a new all-time high, recording weekly gains of 0.68%. Small-cap stocks tracked by the Russell 2000 gained 2.76%, outperforming US large-caps. Small-cap stocks are more sensitive to changes in the US tax regulations than large-cap companies, because they generate more of their revenue inside the US. The Goldman Sachs basket of the fifty highest taxed companies in the S&P 500 beat the broad market index for six days in a row, as investors bet on tax reforms gaining traction.

In an environment characterized by a hawkish Fed intended to raise rates again this year, despite sluggish inflation, market participants anticipating the fiscal stimulus drive interest rates higher. The benchmark yield on 10-year US Treasuries closed at 2.33%, touching its highest level since July.

On the back of the renewed reflation trade, the dollar gained against major peers with the Dollar Index reaching 93.36 on Wednesday before closing the week at 93.08. The Euro/USD closed the week at 1.1814.

Next week, important economic data will be released. The manufacturing PMI will be released on Monday, while the service PMI will be released on Wednesday. On Friday, data about the US labour market will be published, including the September non-farm payrolls (expectations: 100,000) and the unemployment rate (expectations: 4.4%).

Eurozone

On Sunday 24th September, Angela Merkel’s party CDU won 32.7% of the vote in the German elections, while the Social Democrats won 20.2% and the right-wing AfD 13.4%. Even if the CDU showed to be the strongest force in the elections, Ms Merkel will have to find a more complex coalition with two other parties (the Green and the Free Democrats) for her fourth term as German chancellor

European markets ascended to new highs this week. The German DAX 30 index closed at 12,828.86 on Friday near its all-time high three month ago. Also, the CAC 40 increased during the week and closed at 5,329.81 (+1.2% from the beginning of the week), in Milan the FTSE MIB closed at 20,300.06 (+0.9% from the beginning of the week) and the EUROSTOXX 50 closed at 3,495.80 (+1.6% from the beginning of the week). The strengthening of the US Dollar caused the Euro to depreciate by 1% reaching $1.18, while the ounce of gold declined by 1.3% reaching 1,280.29 by the end of the week.

German 10-year bond yields hit an eight-week high on Thursday at 0.479% and closed at 0.464% on Friday. Although, the rise was tempered by a lower-than-expected German inflation data in the afternoon (1.8% versus expected 1.9%), most bond yields remained higher on the day. German unemployment dropped to a record low in September, reaching 5.6% and beating median estimates.

Furthermore, Chancellor Angela Merkel, won a fourth term on Sept. 24 (Merkel’s party CDU won 32.7% of the vote, while the Social Democrats won 20.2% and the right-wing AfD 13.4%.), although her party obtained the worst results since 1949. Most likely she will have to forge a coalition without the Social Democrats, who were part of the previous government, but chose to go into opposition in the new government.

Preliminary numbers of inflation in France were slightly higher in September (1.1% year-on-year as forcasted). However, considering the entire euro zone, inflation data for September came in at 1.5%, below expectations of 1.6%. Even though it still leaves a 0.5% gap to the ECB target rate, there seems to be substantial pressure on Mario Draghi’s interest rate policy, given the Yellen’s speech about the reversal of monetary stimulus accompanied by further rate hikes. Nevertheless, it seems that European markets are strongly recovering from the previous era of uncertainty.

This Sunday, Catalonia will vote on independence and we look forward to the result and the following reactions by the markets next week.

UK

Last week, the most important driver of the UK markets was the year-on-year GDP growth rate release. It showed that the UK’s economy grew 1.5% in the three months ending in June from the same period in 2016, the weakest level since the first quarter of 2013. 0.2% lower than forecasted. On the other hand, the month-on-month GDP growth rate was left unrevised at 0.3% as forecasted. Moreover, household saving ratio was revised to 3.8% for the first quarter, up from a 50-year low of 1.7%.

Data from the Nationwide Building Society showed that house prices in London declined 0.6% year-on-year in the third quarter. This marked the first decline since 2009. However, house prices across the country rose during the quarter, showing a YoY growth of 2.2%.

Despite poor economic data, Mark Carney during his speech on Friday hinted that interest rates were likely to rise in November. This can be supported by the stronger than expected health of household finances, that can also explain the rapid rise in consumer debt, which continued to increase at a near double-digit pace in August, increasing 9.8% from a year earlier.

Following the weaker YoY GDP growth rate, the pound closed at 1.3387 USD, lower than the last week close. With respect to the euro, the pound slightly appreciated to 1.1350 EUR. The FTSE 100 closed up 0.85% at 7373.0 from 7310.63 the previous week close. The weaker pound explains the rally in UK equities. Regarding fixed incomes, the yield on the 10-year government bond closed on Friday at 1.365% at an unchanged level from the previous Friday rate. The yield of two-year UK Gilt closed at 0.47%.

Next week there will be Manufacturing PMI on Monday, Construction PMI on Tuesday and Services PMI on Wednesday, that are forecasted to be 56.4, 50.8 and 53.2 respectively.

Rest of the World

Nikkei 225 closed flat on Friday at 20,356 and ended September with 3.6% gain, best month performance in 2017. Kospi ended a seven-session losing streak on Thursday and rose 24bps for the week at 2,394.47. The country’s two tech giants Samsung Electronics and SK Hynix are down 2.8% and 0.2% respectively this week though the tech-heavy Kosdaq +1.7%. Taiwan stock market opened also on Saturday and gained 52bps, marking the weekly loss at 1.15%. Shanghai Composite and Hong Kong’s Hang Seng index closed almost flat at 3,348 and 27,554 for the last trading week before China enters the Golden Week holiday. Australian market lost 0.6% in September, the fifth-straight monthly loss. The country suffered weakened commodity price this quarter.

The week also marks another milestone for Asian fintech firms. China’s first Internet insurance company ZhongAn hit Hong Kong exchange on Thursday and raised HK$ 1.5 billion after nearly 400 times oversubscription. The firm was set up four years ago by Alibaba, Tencent and Ping An, one of the largest Chinese insurance companies and leader on fintech. Japan’s Money Forward also became the first fintech venture on Friday to launch IPO in Tokyo and closed the first day trading at nearly double the offer price. Money Forward focuses on personal finance and cloud-based accounting software.

USD/JPY closed 13bps higher at 112.5 on Friday and ended the week with level barely changed. Japanese yen has appreciated more than 4.5% ytd, the biggest surge since 2010 when it gained 14.4%. However, net short positions for hedge funds are at two-year-high level due to the short view taken on the Japanese currency and carry trades to take advantage of the negative interest rates. Yen remains the major shorted currency this year with British pound. Under a potentially more hawkish Fed and BoJ’s decision to keep monetary policy loose for longer term, yen is expected to be weaker against the greenback.

Chinese yuan experienced the worst calendar week after its surprising devaluation in August 2015 and closed at 6.647 per dollar. Analysts see the move as Chinese authority’s tolerance on more moderate currency volatility against dollar as it moves to manage it against a basket of currencies. South Korean won fell to the 11-week-low, mostly driven by the foreign selling on the back of tensions on Korea peninsula. USD/MXN closed at 18.26 this week after rebounded almost 15% this year. Governor of Mexican central bank said on Friday the currency is close to equilibrium but will rise further.

Japanese prime minister Abe dissolved the lower house and called a snap election for October 22nd on Thursday. The country’s latest economic data published this week also showed solid inflation, labor demand and factory output. Japanese 10y bond yields +3.61bps for the week. Another news hit global bond market is the selling of $12.5 billion of bonds by Saudi Arabia, making it the largest sovereign debt issuance of the year. The money is believed to help the kingdom’s budget deficit and the economic reform plan to wean off oil dependency.

Brent oil settled at $57.54 on Friday after being pushed to the two-year-high $59.49 on Monday due to the speculations on supply disruptions in the Middle East. Gold traded at $1,281 an ounce, $32 down from the high point reached on Tuesday.

Categories: Markets

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