US equities supported by positive economic data, progress on tax reform and Fed commentary
US GDP growth in Q3:2017 was revised up by 0.3 pps to 3.3% qoq saar, the strongest outcome since Q3:14. Nowcast GDP models (Atlanta & NY Fed) point to Q4 growth of circa 3.7% qoq saar.
Outgoing Fed Chair Yellen’s recent remarks underscored the momentum of the US economy, while incoming Chair, Mr Powell, in his statement to the US Senate, supported the view for continuity on the monetary policy front, while underpinning the intention to ease regulatory burdens on US banks.
Τhe US Senate voted in favor of a tax reform bill, which will now need to be reconciled with the House’s version. The legislative focus will first seek approval for a short-term Government spending bill, as the current Government funding expires on December 8th.
The ECB, in its semi-annual Financial Stability Review, reiterated that risks remain regarding financial stability in the euro area. These include a sudden repricing of risk premia in financial markets due, inter alia, to a faster-than-expected withdrawal of monetary policy accommodation in advanced economies, that could also lead to public and private sector debt sustainability issues. Nevertheless, the ECB assessed these risks as low and that financial stability in the euro area continued to improve (see graph).
In the UK, the Bank of England’s (BoE) annual stress tests confirmed that UK banks (+1.1% on Wednesday) are sufficiently capitalized to absorb potential losses and continue to support the real economy even in severe adverse scenarios (see Economics).
Downside risks could stem, inter alia, from a disorderly Brexit. Such a probability, however, has declined, amid reports that the EU and the UK are close to an agreement on a financial settlement (“divorce bill”) ahead of the December 14th – 15th EU Summit. As a result, the GBP appreciated in the past week, by 1.4% wow against the euro to €/0.883 and a further 0.3% on Monday to €/0.880.
Global equities were mixed (MSCI World flat wow), with Financials over-performing (+1.5% wow). The S&P 500 rose by 1.5% wow to record highs, with Financials increasing sharply (+5.2% wow), due to positive commentary by Fed officials. Note, however, that the S&P 500 recent highs are supported by fewer and fewer companies (see graph).
US Treasury 10-year yields rose (+2 bps wow and +1 bps on Monday, to 2.37%) due to a positive economic outlook, progress on tax reform legislation and signs of firming inflation (core PCE: +0.1 pp to 1.4% yoy in October).
At the November 30th meeting, the OPEC-led oil production cut deal was extended by nine months to December 2018. A review of the deal will take place in June 2018, based on market fundamentals. Spot prices were broadly stable in the past week as the extension had already been priced-in by investors (Brent: +0.3% wow to $63.7/brl).