World Markets at a Glance

In this week’s issue:

• Global markets react positively to an overabundance of positive weekly news
• A plethora of good earnings reports from US technology companies push markets higher
• Japanese Prime Minister Shinzo Abe secures a two-thirds majority and is re-elected
• The ECB announce a further downsizing of their monthly bond buying programme
• In China President Xi Jinping formulates new Politburo Standing Committee
• Global equity markets remain the asset class of choice given that bonds look expensive

“Global equity markets respond to a week of positive results”

Last week we saw the financial markets react positively to a plethora of economic, fundamental, and political results. In the United States the release of very positive corporate earnings figures from the big tech names such as Amazon, Alphabet, Microsoft and Intel saw their stock prices propel upwards giving the four companies a combined market cap value of around US$12 trillion.

In fact, in respect to the value of Amazon its price actually added more value in a single day last week than that of more than 400 individual S&P 500 companies. Amazingly, Fridays share price saw Amazon gain a staggering US$61.7 billion of additional value for its shareholders making CEO and founder Jeff Bezos the richest man in the world with an estimated wealth of US$90 billion. Indeed, this year alone the company’s share price has become one of the best performing large-cap stocks in on the US stock market advancing by some 47.0 per cent.

Understandably, this rise in the US tech stocks has had a very positive affect on the Nasdaq Composite, and S&P 500 indices, which in turn, recorded intraday all-time highs. Likewise, in respect to this year’s performances of the technology driven indices the Nasdaq Composite and Nasdaq 100 have risen by 24 and 27 per cent respectively with the Dow Jones and S&P 500 Indices rallying by a lesser amount, 18 and 15 per cent.

Equally, the wider US market did benefit from fresh reports that US President Donald Trump was considering nominating Jerome Powell as the next chair of the Federal Reserve Bank. Mr Powell is currently a governor of the US central bank and generally regarded as someone that is less hawkish on central bank policy than perhaps John Taylor who many see as another possible candidate for this important roll. Clearly, current market sentiment believes that whoever takes over as the new Fed chair will continue tightening at a lacklustre pace especially as inflationary pressures appear to be rather sluggish.

However looking forward, investors are now focusing their minds on the Presidents promise of a Trump reflationary package that was talked about in his inaugural speech and in the early weeks following his presidency. This package comes in three parts, firstly, the promise of tax cuts which is proving to be more difficult than was first thought, but is likely to happen in some shape or form, secondly, infrastructure expenditure, which again needs the support of the house, and thirdly, de-regulation which admittedly the President has had some success.

Therefore, whilst Q3 US GDP growth did grow at 3.0 per cent on an annualised basis, much better than the predicted 2.5 per cent consensus forecast, the President and his administration, now really need to deliver much more on their reflationary package and of course, the corporations need to provide more profitability and rising dividends to their shareholders, given that US shares are no longer cheap and consequently could be vulnerable to any disappointment.

Another domestic event that appears to have been really stimulating for its stock market has been in the build-up, and eventual result of the Japanese election. Unquestionably, there have been some recent concerns voiced by the Japanese people about Prime Minister Shinzo Abe’s government policies, but after a resounding election victory, the likelihood now is that his stimulus policies for the Japanese economy will remain. Once again, this result has been positive for their equity market and has seen the Nikkei 225 Index rally to its seventh successive weekly advance and perhaps more importantly to a fresh 21-year high.

Clearly, with Mr Abe achieving a two-thirds supermajority in parliament will allow him to pursue his priority of constitutional reforms, and from a central bank perspective, continuity at the Bank of Japan, which is critical for the Japanese stock market. Moreover, there is now little to prevent Mr Abe from reappointing Haruhiko Kuroda as BoJ governor when his first term ends next April, or indeed, finding a dovish replacement that will put downward pressure on the Japanese yen, government bonds and provide support for stocks.

Admittedly, we have seen the Nikkei 225 Index rally some 15 per cent this calendar year and perhaps more impressively from 7173 in March 2009, to the current level of 22,008, but this market is still very much under owned, indeed, even the Japanese investor still has more money in zero percent yielding bank deposits than in equities; In fact, this market tends to rely more on foreign investors than its domestic investor. But of course, under the continuation of Abenomics this might begin to change. Indeed, with the largest pension fund in the world, Japans Government Pension Fund, now actively increasing its Japanese equity exposure could create further stimulus to the market and to the appetite of the domestic investor.

Moving onto Europe, the European Central Bank surprised the markets by announcing that they would extend their economic stimulus programme until at least September next year. The President of the ECB, Mario Draghi, said that they would halve the monthly bond buying programme from €60 billion to €30 billion but keep the commitment open ended. Mr Draghi did confirm that the existing programme would remain in place until the end of the year, and then would halve, stating that their decision was not based upon “tapering” but a “downsizing” adding that QE was not going to stop suddenly.

Furthermore, the ECB did confirm that interest rates would remain at a record low until “well past” the end of QE which surprisingly created very little response from Germany where years of negative interest rates and stimulus has created much animosity amongst its people given the returns they have received on their cash deposits over recent years. Clearly, the ECB’s concept of slow downsizing would now suggest that interest rates are likely to be kept at their current lows to at least 2019.

And now lastly, China’s 19th party congress saw President Xi Jinping take centre stage as China formulated their new Politburo Standing Committee at the closing of the Communist party congress in Beijing. Surprisingly, the party failed to designate a clear potential successor to President Xi Jinping, which clearly breaks with Chinese tradition; however, there is a chance that a possible successor will be found before the next party leadership transition in 2022. Nevertheless, President Xi Jinping did promise to continue with the economic reforms set out some 40 years ago by Deng Xiaoping saying that “the great rejuvenation of the Chinese nation will become a reality”.

Market Summary

And so moving onto last week’s financial markets, clearly, they responded positively to many of those events mentioned in the above text, but it was unquestionably those corporate earnings numbers that helped to propel Wall Street to much higher levels. In respect to Europe, the remarks from the ECB acted as a tailwind for European equities, whilst Mr Abe’s election win pushed the Nikkei 225 Index to a 21-year high, even a softer tone to sterling helped the FTSE 100 Index to close above 7,500.

But of course, it’s still the Asian and Emerging Markets that are delivering the best returns so far this year as investors believe that the speed in which the Federal Reserve Bank will raise interest rates will not be that harmful towards these markets, also the pick-up in their corporate profitability and their current valuations continues to make them an attractive option especially against the US which looks priced to perfection.

And in the fixed income markets the 10-year US Treasury yield rallied back to 2.4% over the week on the back of strong US economic data. Also the markets have priced in an 85 per cent chance that the Fed will raise interest rates in December, similarly, we might see the Bank of England raise rates before the end of the year. In Europe we saw the German 10-year Bund end the week at 0.41 per cent as markets absorbed the announcement from the ECB that it would scale back on its bond buying programme whilst leaving interest rates at their current level.

Moving onto the currency markets, we saw the US dollar rise by 1.4 per cent on the back of a relatively dovish ECB announcement whilst the euro slipped down by 1.5 per cent which reflected both the ECB statement and escalating concerns over Spain’s sovereignty dispute with the region of Catalonia. Then finally, sterling weakened by 0.5 per cent driven by a stronger US dollar on the back of a better than expected US GDP number.

Finally, on commodities, the price of Brent Crude Oil hit US$60.0 a barrel for the first time in more than two years, which indicate that perhaps the market is tightening after a three-year glut. Clearly, oil has been in strong demand recently as the world’s economy expands at its fastest rate in years.

Unquestionably, solid global demand coupled with OPEC – led cuts has clearly had a detrimental effect on supply and demand, along with rising geo-political risks. But the question going forward will be can the price hold above US$60.0 given that it is likely that any additional over supply could cap any further advance on the price of oil.

And so to conclude, it is likely that the markets will continue to react positively to good news and historically we do tend to see the markets edge higher as we draw closer to the festive season, but investors should remain mindful of the fact that equity markets have become less attractive over on a valuation perspective but they continue to look more striking than bonds that look expensive.