Global equities up, in anticipation of Trump’s tax plans
In a light week in terms of economic announcements, global equity markets were up slightly on the back of President Trump’s renewed promises on tax reform, as well as positive earnings announcements in major regions (see graph).
The S&P 500 rose 0.8% wow to a record high, with earnings announcements remaining supportive. EPS for Q4:2016 (with 72% of firms having reported) are up by 4.3% yoy, while analyst expectations were for a 3.0% yoy increase at the start of the reporting season. Note that c. 68% of firms that have reported, so far, have exceeded analyst expectations.
Since mid-December, the USD and US Treasury yields have lost some ground, in anticipation of more US policy clarity and overstretched positioning following the US elections (see graph). At the same time, EM equities have recovered their losses, and year-to-date are up 5.6%.
US Treasury 10-Year yields have declined by 19 bps since December 15th (+55 bps since the US elections). The decline is due to easing growth expectations, with inflation expectations holding up (see graph on page 3), linked, inter alia, to oil price movements.
Oil prices rose on Friday (Brent: +1.4% / WTI: +1.6%) mainly due to OPEC countries’ compliance with the agreed oil production cuts (-1 mb/day in January, close to 90% compliance, according to the International Energy Agency). However, they remain range-bound year-to-date, as lower OPEC supply is offset by an increase in US oil production.
French government bonds (OATs) underperformed, amid political uncertainty over the upcoming Presidential elections, with the OAT/Bund spread intraweek reaching its highest level since November 2012 (77 bps).
The People’s Bank of China (PBoC) increased its rate on open market operations by 10 bps and on the standing lending facility by 10-35 bps. Although these are not high profile monetary policy tools (such as the benchmark interest rate or the required reserve requirement), these moves, along with the recent rise in the medium-term lending facility rate by 10 bps, indicate that the PBoC could be reverting towards a tightening bias to contain financial risks.
Meanwhile, capital outflows, another source of concern for the Chinese authorities, continued in January, with FX reserves below $3tn for the first time since February 2011 (down by $12bn in January to $2.998tn) versus a peak of $3.993tn in June 2014.
The European Commission (EC) expects euro area real GDP to expand by 1.6% in 2017 and by 1.8% in 2018, from 1.7% in 2016. These projections are slightly higher (by 0.1 pp in each year) compared with November, due to the build-up of momentum demonstrated late in 2016. The EC expects real GDP growth in Greece at 0.3% in 2016 and an acceleration thereafter (2.7% in 2017 and 3.1% in 2018).