December 2016 | www.selectasset.com
December 2016 Market Update
Stocks performed better than many economists expected after the announcement of Trump’s Electoral College victory. The Dow Jones industrial average had its best weekly performance since December 2011 and continued to rise throughout November. According to Bank of America, the week of November 16 saw a USD 28 billion equity inflow, the biggest in two years, and a bond flow of USD 18 billion, the largest in three and a half years. This marked the “widest disparity between stock and bond flows ever.” CEO of Berkshire Hathaway, Warren Buffett, “has seen his investment portfolio explode” as bank stocks surged. Estimates reported by CNBC place his total gains at more than USD 11 billion so far. Despite the market’s post-election performance, many economists express concern for the future. Federal Reserve Board Chair Janet Yellen in a testimony after the election stated, “There remains a lot of uncertainty.” However, the Organization for Economic Cooperation and Development (OECD) raised its forecast for U.S. growth from 2.9% to 3.3% in 2017 and predicted that it would accelerate to 3.6% in 2018. Concerning interest rates, markets have expected the Federal Reserve Board to raise its benchmark interest rates. On November 17, Yellen said, “an increase could well become appropriate relatively soon.” The Federal Open Market Committee meets on December 13-14, and market observers are predicting a “near-100 percent chance” that the Fed will raise its short-term rate. Yellen has also spoken about a “high-pressure economy” that would have “robust aggregate demand and a tight labor market,” all of which points to massive borrowing, changing interest rates, and inflation. Investor expectations regarding tax cuts and increased government spending with the incoming Trump administration have already driven financial markets to raise long-term interest rates. However, many analysts also warn that without “real improvement in productivity,” reflating the economy and raising rates will not help people’s inflation-adjusted paychecks. How President-elect Trump’s proposed USD $1 trillion infrastructure investments and tax cuts will impact the economy remains to be seen.
Debates over the economic impact of Brexit are still alive in the UK. The Bank of England, as well as foreign institutions such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) has said Brexit would potentially lead to a recession. Such a recession has yet to manifest. Business investment rose 0.9% and GDP had grown 0.5% in the third quarter according to the Office for National Statistics. Consumer spending continues to drive this growth, but increased exports together with lower imports have also helped. Data released in mid-November showed, however, that the construction industry has contracted for the second straight quarter and is now in a “technical recession.” Output for manufacturers was down in general. Economists remain cautious about the short-term future. Growth experienced now may not last into next year. The Office for Budget Responsibility, an independent forecaster within the government, predicts that as business investments decreases and incomes come under pressure from inflation growth will slow from 2.2% to 1.4% in 2017. The Guardian reported on November 25 that “a leading think tank (the Institute for Fiscal Studies) warned this week that the combination of rising inflation and weaker pay growth as Brexit unfolds will mean UK workers face the longest squeeze on their pay for 70 years.” Behind all these concerns is the question as to whether or not there should be another referendum. Former Labor Prime Minister Tony Blair argued that Brexit could be reversed “if the public changed its mind,” and former Tory Prime Minister Sir John Major echoed this sentiment by stating that there is a “perfectly credible” case for a second referendum. The UK’s High Court additionally ruled that the government needs parliamentary approval to start negotiations with the EU about UK’s exit.
The announcement of Trump’s Electoral College victory sent the euro to its lowest level in nearly a year. Since Trump’s position on many issues is still unclear, European policymakers are concerned that the U.S. could become more protectionists. Brexit also continues to be a leading issue among policymakers and economist, and regional politics only adds to uncertainty. On December 4, Italians voters turned rejected constitutional changes backed by the government. This prompted to Prime Minister Matteo Renzi’s resignation, which has potential implications for the health of Italy’s banks and Europe’s common currency. Though economists predicted this vote hinder future investment, by December 5 the euro recovered from early losses and stocks grew. France, Germany and the Netherlands face general elections next year. Eurostat estimates that the Eurozone’s GDP grew 0.3% in the third quarter since second quarter thanks to solid domestic demand, though the pattern of growth varied within the region. France’s economy rebounded to 0.2% from -0.1%, Italy’s grew from 0.0% to 0.3%, and Greece’s rose to 0.5%. However, Germany’s growth was only 0.2% in the third quarter, and Spain dipped a bit to 0.7%. Eurozone exports grew 2% while imports dropped 2%. Much of the growth experienced came from domestic demand. “Harmonized Inflation” for the region rose to 0.5% in October in part because of the waning impact low energy prices. Yet, European Central Bank (ECB) President Mario Draghi still feels that inflation below 1.0% is in the “danger zone.” As for the fourth quarter, economists foresee a steady, but a “lackluster” repeat of the third quarter. Next year is expected to be slower with growth for the region as a whole, dropping to 1.4% from a predicted year-on-year 1.6% in 2016. The European Union did better with GDP growth at 0.4% quarter-on-quarter and 1.8% year-on-year. In the financial sector, the ECB reported that 14 Italian banks have 286 billion of the 990 billion euros of unpaid loans. This is not a new issue, and the banks have set aside a significant reserve toward these loans. However, economists are concerned that political instability could burden these weaker banks.
Initially, news of Donald Trump’s Electoral College win hit the Tokyo Stock Exchange (TSE) hard. The Nikkei 225 index “nosedived” by 919.84 at 5.36 percent on November 9, the biggest one-day drop since Britain’s Brexit vote. The Tokyo Stock Price Index (TOPIX) also finished 62.33 points lower at 4.57 percent. Despite these drops, on November 10 the Nikkei 225 soared 6.7 percent and continued to climb upward until the end of the month when it finally dipped. Trading of the yen saw a similar pattern. The yen appreciated to 101 yen to the USD before steadily declining to 115 yen to the USD and finishing at the end of the month at around 111 yen to the USD. Even with these fluctuations, Japan’s economy is not showing any major changes. Japan recorded a JPY 496.2 billion trade surplus in October, less than market expectations. Exports declined by 10.3 percent year-on-year, the thirteenth consecutive drop and worse than the expected drop in exports of 8.6 percent. Imports dropped by 16.5 percent. According to analyst group Trading Economics, Japan’s GDP quarterly growth rate will be 0.40 percent in the fourth quarter, down slightly from 0.5 percent in the previous quarter. They predict a growth rate of 1.20 percent in 2016, and a rate of 1.3 percent for 2017. Japan’s annualized growth is expected to be 1.80 percent by the end of quarter four, and 1.50 percent a year from now. Inflation is expected to be -0.20 percent by the end of December, down from 0.1 percent in quarter three, while the “core inflation rate” will finish slightly up at -0.3 percent. Currently, Prime Minister Shinzo Abe’s trading concern is the Trans-Pacific Partnership (TPP) agreement. Though Abe’s administration made enormous efforts to pass it through the Diet, President-elect Trump has stated clearly that he will not sign the agreement, threatening to kill the partnership plan.