Last Thursday President Trump nominated Jerome H. Powell to chair the Federal Reserve, bypassing Janet L. Yellen for a second term but turning to a replacement who is expected to stay the course on monetary policy if the economy continues its steady growth. As a result, investors do not expect an aggressive hiking rate path like the one that would have likely taken place if John Taylor was appointed as the Fed chairman.
As a result of these expectations, the UST 10 yield is now at 2.3325%, compared to last week closing value of 2.4083%, with an absolute change of -0.0758 points.
USD-EUR closed on Friday night at 0.8614, with the corresponding EUR-USD at 1.1607, almost perfectly unchanged since last week closing value of 1.1606.
Also, the dollar index, which reflects the performance of the dollar against its major peers, has remained stable, reporting weekly loss of -0.12% closing at a level of 94.697 on Friday.
The S&P 500 showed a little bit of volatility over the week, with a weekly minimum registered on Thursday at 2567 but closed at a new all-time high of 2587.84, reporting a small gain over the week equal to 0.32%
The Russell 2000, that is, the small cap index, closed the week at 1494.91 with a negative absolute change of 5 points since last week.
The next market move could well be announcements on the tax reform proposal which may have a heterogeneous impact across industries and therefore across asset prices. However, it is unlikely that anything on this side will happen before the half of the month.
Although for the moment its repercussions on the markets are limited, the Catalan affair remains at the top of the news in the European newspapers, and is all but concluded. On Thursday, nine members of the former secessionist Catalan government have been arrested (one of them released the day after upon payment of a bail) and will face a trial for rebellion, sedition and embezzlement. Among them is not Mr. Puigdemont, who fled to Brussels with some other ministers on Monday. As regional elections have been called for December, this is likely to be the main news in Europe for the months to come.
Other key announcements that occurred last week included the European GDP growth rate, estimated at 0.6% for the third quarter, totalling 2.5% YoY, strongly above market expectations at 2.1%. This is the strongest rate of expansion since 2011. However, among the countries for which data are available, GDP growth slowed for Spain, France and Belgium. In addition, the September unemployment rate in the Euro Area was estimated at 8.9%, compared to forecasts at 9%, and is the lowest rate since January 2009. Finally, inflation (consumer prices) in October increased 1.4% YoY, slightly below previous forecasts at 1.5%.
These news, coupled with last week speech by Mario Draghi in which the governor clarified that the QE tapering will be only gradual and smooth, helped the EUROSTOXX 600 index to reach its record high in November 1st, touching 397.8. It then closed at 396.06, a 0.67% gain on a weekly basis. It confirms the strong week that characterized all European markets, with the German DAX that closed on Friday at 13,479, gaining 1.98% from the previous week and reaching an all-time high, the French CAC 40 closing at 5,518 and gaining 0.14%, and the Italian FTSE MIB that closed at 23,014, gaining 1.54% on a weekly basis and 41.03% YoY. Despite internal tensions, also the Ibex 35 gained 1.57% during the week, reaching 10,358.
On the fixed income side, all rates remained quite stable during the week, with German 10Y at 0.37, French 10Y at 0.75%, Spanish 10Y at 1.47& and Italian 10Y at 1.79%. It’s worth mentioning that after the successful sale of €1.13bn of 6-months T-bills on Wednesday, Greece 10Y rate is now at 5.14%, a 2.69% decline from last Friday.
Finally, EUR/USD is stable at 1.1606.
On Thursday the Bank of England announced the very first hike after a decade of the key-policy rate to 0.50%. The contraction in the monetary policy stance was motivated by the rise to 3.0% of September CPI inflation along with the 42-year low unemployment rate. This hawkish decision came without surprise since a 25 basis point increase in Bank Rate had been almost fully priced in by market participants. Seven members of the Monetary Policy Committee voted in favor of rising rates whilst two members voted against the proposition. However, Carney’s post meeting speech was perceived as highly dovish and, with a hike-and-done attitude, markets now think that no more hikes will come. Dovishness in the BoE Governor’s speech is the reason behind the fall of the British currency versus USD, going from 1.322 to 1.310 in the immediate aftermath of the hike announcement. GBP closed the week at 1.3076, down 4.25 percentage points from the year high of 1.3656. Vis-à-vis the Eurozone currency, GBP was down to 1.1243 from 1.1346 following the BoE rates’ decision and closed the week at 1.1262, down 0.41% from the beginning of the trading week value of 1.1308. The 2-year Gilt yield, that is, the rate most affected by monetary policy dynamics, closed the week at 0.407% down from the pre-hike value of 0.498%. In turn, the 10-year UK govies closed the week at 1.267%.
The Bank of England’s MPC also voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion and the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
On the equity side, the blue-chip FTSE 100 was almost flat, gaining 0.73% over the week and closing at 7560.35 whilst the mid-cap index, that is, the FTSE 250, was up 1.62% over a week ago.
On next Friday, a few data on the British economic environment will be released: the manufacturing output and industrial output as well as the goods trade balance. Manufacturing and industrial output are both expected to rise on a month-on-month basis of 0.3%, whilst the expected year-on-year growth data are, respectively, 2.4% and 1.9%.
Rest of the World
Venezuelan sovereign debt has always been a point on contention for investors. It was an established belief that default is not a question of ‘if’, but ‘when’. On November 2nd Nicolás Maduro, the country’s authoritarian president, announced that he would order a “refinancing and restructuring” of foreign debt worth about $105bn. This figure, approximately 10 times the size of Venezuelan foreign reserves, took its place as the second biggest sovereign debt default in history behind Greece’s restructuring of $261bn. Bonds issued by the government and PDVSA, the state oil company, fell by 25%-40%.
Oil gained on news that global inventories are shrinking and the OPEC and allied producers may extend their cuts beyond their March expiration. West Texas Intermediate for December delivery advanced $1.10 to settle at $55.64 a barrel on the New York Mercantile Exchange and climbed for a fourth week.
On her visit to Japan, Ivanka Trump bolstered the Japanese government’s efforts to increase female workforce participation during a speech. The speech was seen to strengthen Prime Minister Shinzo Abe’s “Womenomics” initiative. The Nikkei 225 closed at 22539.12 while the Japanese yen gained 0.081% and closed at 114.0750 against the dollar.
In a recently published article, Chinese central banker Zhou Xiaochuan warned about the growing instability of the Chinese financial markets due to leverage. “High leverage is the ultimate origin of macro financial vulnerability,” wrote Zhou, 69. The Hang Sang gained 0.30% points and closed at 28,603.61.
Lebanese Prime Minister Saad al-Hariri unexpectedly resigned on Saturday in a televised speech from Saudi Arabia. In his speech, he confirmed his fear of his life and accused Iran and its proxies of destabilizing the region. Saudi Arabia’s King Salman embarked on sweeping crackdown restructuring key positions and driving out some of the richest men in the country. Security forces arrested 11 princes, four ministers and dozens of former ministers and prominent businessmen. Gold lost 0.57% at closed at 1270.20