This week, similarly to the past month, the main focus of the US market was the tax reform which would strongly impact US small-caps equities and the US dollar. In particular, on Thursday, the US House of Representatives voted to pass its version of the bill. Although this is a step forward to the approval of the official reform, a common belief is that the real lobbying efforts start now in the Senate where the bill could take more than expected to be approved. Regardless, some version of the tax reform may be achieved in the first quarter of 2018 rather than by the end of the year.
These uncertainties, together with the re-emerging rumors concerning the Russian interference in the 2016 election of President Trump, impacted negatively the S&P500, which lost 0.13% this week closing at 2578.85, 0.6% lower than the record level of 2594.38 of the 8th of November.
In addition, the S&P500 was negatively impacted by the fall in oil and metal prices, as participants digested a report from the International Energy Agency in which it lowered its oil demand forecasts and said US crude output would rise sharply in coming years. Furthermore, the dollar index lost 0.8% this week closing at 93.63, the lowest level this month. One of the main contributors is certainly the strong appreciation of the Euro following last week’s release of the economic data on German growth, which was above expectations for the Q3 2017.
For what concerns US treasuries, the focus has been on the continuous flattening of the yield curve. In particular on the one hand, 2-year treasuries were up 1bp to 1.73% given that the market considers really likely a rate rise of 0.25% from the FED next month. On the other hand, the interest rate implied from the price of the 10-years Treasuries was down 1bp to 2.35%, resulting in a spread between the two of 0.62%, which is the lowest in a decade. Such a flattening, historically, has been a signal of future regression, but yet another justification may be that this phenomenon is a function of supply and demand dynamics in a fixed income world warped by central bank policies. In particular, 10y US treasury shows a much more attractive yield than its international counterparts, thus the price of such instrument keeps rising, thus lowering its implied yield. This “abnormal” demand for US 10y treasury is likely to smoothen with the progressive normalization of interest rates internationally and with the expected rise in US inflation. Indeed, this should progressively steepen again the yield curve.
Next week could be pivotal for markets for two reasons. First, relevant news on the US tax reform could come out, modifying the expectations of the market. Second, FED chair Janet Yellen is going to give a speech on Tuesday on the macroeconomic outlook of the US economy, thus potentially changing expectations on inflation and the likelihood of future rates rise.
This week should bring an end to political turmoil in Germany after recent elections as Sunday was said to be the deadline for creating governing coalition. Apart from this, European markets suffered the pressure attributed to strengthening Euro and disappointing corporate earnings. On that account Indexes showed mild volatility with a general tendency to decrease throughout the week. Commodities indexes closed the week lower (STOXX 600 Oil & GAS closed week at 305, -3,49% WoW) after the Norway Sovereign Fund announced excluding oil and gas companies from their benchmark index.
Frankfurt Stock Exchange proved to be pessimistic as DAX fell by 1.2% (12993,73). French CAC 40 follwe and decreased by 1.32% (5319,17). STOXX 50 dropped by 0.5% (3547,46) and IBEX 35 toned down to 10010,4 (-0.63 WoW).
German 10Y Bonds yield dropped significantly from 0.417 to 0.361, while the Italian equivalent maintained almost unchanged return rate of 1.836% (+0.2 bps). French 10Y yield dropped by 73bps and finished the week at 0.706%, additionally pushed by EBC inflation results (1.4% YoY).
Changes in currencies are to blame for negative sentiment in the markets with Euro strengthening in comparison to both GBP and USD, closing at 0.8923 and 1.1790 on Friday after discounting positive information about EU GDP growth rate equal to 2.5% YoY (in line with forecasts) and balance of trade for September amounting 26.4B Euro (In comparison to 25.1B Euro predicted).
On Thursday 23rd, German GDP Rate for Q3 is going to be published (with forecasts of 2.8%), just one day before the indicators of IFO Business Climate (expected 116.9) and Current Conditions (expected 123.6) for November. Next week is also believed to provide additional information concerning the recent volatile rise and, perhaps, will address cautious questions about the future direction of European markets.
Political uncertainty surrounding Brexit has been a significant driver of UK markets as the British government is still stuck in Brexit negotiations. European Union president Donald Tusk, after a meeting of EU leaders on November 17, set a deadline for Theresa May’s government to give ground on the exit bill in December if negotiations are to move on to trade talks next year. The fear of a further delay in Brexit trade talks weighted on UK equities, with the FTSE 100 falling 0.70% this week and closing on Friday at 7,380.68.
Macroeconomic data released this week show that the British economy continues to lag continental Europe. For the first time this year, the number of people employed fell in October. This drop did not lead to an increase in unemployment (steady at 4.3%) because of higher inactivity.
Labour market data showed a weak wage growth, falling 0.5% in real terms. Data on retail sales, published on Thursday, beat analysts’ expectations. However, sales were 0.3% lower if compared with last year. Weak spending is a consequence of an economy characterized by subdued nominal wage growth and rising inflation.
Labour market data will determine the future path of UK interest rates and this week’s data cast doubt over 2018 rate hikes by the BOE. The yield on 10-year Gilts slipped to 1.294% from 1.342% of last week.
The pound appreciated against the dollar, closing the week at GBP-USD 1.3215. By contrast, the pound weakened against the common currency, closing the week at GBP-EUR 1.1216.
Rest of the World
Japan’s Nikkei 225 closed at 22,396.80 on Friday, immediately recovering from the weeks low point on Thursdays and overall marking a decrease of -0.9% on a weekly basis. Topix closed at 1,763.76 (-1.9% on a weekly basis), the Shanghai Composite Index closed at 3,382.91 (-1.5% on a weekly basis) and the Hang Seng Index showed a minor increase over the week (+0.5%) closing at 29,199.04 on Friday. Overall, markets showed a general slow-down this week after the previous weeks of ever increasing prices, which many analysts claim to be the result of a general realization of profits.
The Yen strengthened by 1.3% against the US dollar week-on-week, closing at ¥112.11. The Australian dollar weakened over the week, reaching a 3-month low on Friday and closing at $0.7568, losing 1.05% week-on-week. The Euro lost almost 0.1% against the Yen over the week, closing at ¥132.28 on Friday.
Oil prices decreased this week, after news spread that America continued to have an increased output and showed a minor correction with respect to the recent surge, which we had witnessed over the past weeks. Crude closed at $56.40 per barrel on Friday, losing 1.14% in the week and also Brent closed at $62.75 per barrel posting -1.66% weekly losses. Gold closed at $1,295.16 per ounce on Friday after it gained 0.86% over the week.