Global Markets Roundup: Equities start 2017 on a positive note, as post-Trump election optimism persists
Global equities began the year well, on the back of expectations for: i) an expansionary US fiscal policy; ii) a US Government focusing on less regulation; and iii) still broadly supportive central banks. The S&P500 rose by 1.7% ytd, bringing its post US-election rally to 6%.
Valuations have now become more expensive, with S&P’s forward 12-month PE level at 17x vs 16.3x (or +4%) before the US elections and a long-term average of 14.4x (since 2004). However, expected earnings have also increased slightly (+2% to $133), suggesting that bottom-up consensus has started to incorporate a more favorable outlook into their projections.
For risk appetite to continue to remain high, the Trump administration (Inauguration Day: January 20th) should deliver on corporate tax reform and particularly on lowering the statutory tax rate (of 35%). Obstacles stem from possible escalating trade tensions (tariffs) with China, which continues to intervene aggressively in the market (FX reserves down by $42bn to $3.01tn in December and -$195bn in H2) in order to support the RMB (6.93/$).
The Fed appears to share some of the market’s optimism. According to the minutes of the December meeting (published on January 4th), Fed officials see further upside risks for US growth and inflation (see graph). However, the Fed’s US GDP point estimates for 2017 remained broadly unchanged at 2.1%, due to uncertainty regarding the prospective fiscal stimulus.
Lower taxes and higher spending from H2:2017, if fully materialized, could boost US GDP growth and inflation. Furthermore, already accelerating wages (+2.9% yoy, their highest level since mid-2009) and strong job gains (see Economics section) could trigger a more-aggressive-than-forecast Fed (3 interest rate hikes are expected for 2017).
The ECB is expected to continue with its extended QE, albeit at a slower pace, until end-2017 (expected asset purchases of €780bn or 7% of GDP). However, the risk remains that inflation could rise sharply (due to a further depreciation of the euro and increasing oil prices), thus triggering “tapering”. Indeed, euro area inflation accelerated to its highest rate since September 2013 (+1.1% yoy).
Regionally, Japanese equities increased by 1.8%, supported by the ongoing depreciation of the JPY, with the Nikkei225 at its highest level since December ‘15. Euro area equities followed suit, with the SXXE up by +1.1% ytd.
Italian bank equities have found some support following the establishment by the Italian Government of a €20bn fund (1.2% of GDP) in order to ensure financial stability through: i) enhancing capital via precautionary recapitalization of banks that have a capital shortfall in the adverse scenario of a stress test; and ii) a bond-issuance guarantee scheme for banks that have no capital gap.
Monte Paschi di Siena gained access to the “precautionary recapitalization” fund, as it failed to raise capital. BMPS requires €8.8bn to bring its CET1 ratio to 8% and the Total Capital Ratio to 11.5%. The direct cost to the Italian Government would be €4.6bn plus circa €2bn in order to compensate retail holders of subordinated bonds. The remaining amount of sub-debt (€2.2bn) would be converted into equity.