January 2017 | www.selectasset.com
January 2017 Market Update
In early December, President-elect Trump struck a deal with air conditioning company Carrier to keep 1,100 jobs in Indiana, USA in exchange for USD 7 million state tax breaks. Forbes reported that only 800 jobs were actually saved out of the total of 1,800 jobs Carrier planned to outsource. Economists have voiced concern that Trump's deal with Carrier could negatively impact future labor negotiations. Throughout December, Trump singled out Rexnord, Carrier, and Ford Motors with charged rhetoric in tweets. Trump’s tweets on Boeing in early December had an immediate negative effect on stocks. Politico explains, “Trump’s attacks have other executives and business groups worried that they will be singled out for making moves dictated by the marketplace and demanded by shareholders.” As foreseen by many economists, on December 14 the U.S. Federal Reserve raised interest rates a quarter of a percent. With Trump’s promised steep tax cuts and infrastructure spending, the Fed aims to prevent inflation by bringing interest rates back to normal levels. Economists widely predict the Fed will continue to raise interest rates two more times in 2017. The Dow Jones Industrial Average neared 20,000 points following the interest rate hike. At the end of December, U.S. Department of Commerce stated the U.S. economy grew 3.5% in the third quarter compared to this time a year ago. The Fed predicts the economy will grow around 2% for the next few years. Throughout the month, the dollar has continued to rise against most major currencies.
Since the Brexit referendum, the UK economy has recently shown signs of weakening. Along with reports that manufacturing output fell in October, labor market reports from both the Office of National Statistics and Bank of England reveal that employment fell for the first time in more than a year. Inflation rates have increased due to higher oil prices, though the strengthening of the sterling by 6.5% in mid-December has relieved some pressure created by this inflation. Regular annual pay growth grew from 2.4% to 2.6%, which may also help curb the impact of inflation. However, economists foresee prices outpacing wages in the coming months. According to Bank of America-Merrill Lynch in London's Rob Wood, the UK still faces a “sharp growth slowdown” since the Brexit vote despite data that predicts UK economy expanding during the fourth quarter. Economists also view the gap between UK government spending and income that spiked in November as a warning sign to investors of an impending economic slowdown. Interest rates remain at 0.25%, however, the Bank of England warns that household budgets may feel a squeeze from rising inflation. The Bank of England also voted to maintain their current program quantitative easing accomplished through printing electronic money. On December 22, the Brooklyn U.S. prosecutor filed a federal suit against Barclay over 36 pools of mortgages sold by the bank from 2005 to 2007. These mortgage securities from Barclay cost investors billions of dollars much like mortgages from other European banks during the 2007 economic crisis.
After some struggle, Greece is set to receive debts relief. On December 5, finance ministers of the Eurozone agreed to provide assistance to Greece’s debt burden by easing repayment schedule of bailout loans, waiving a coupon penalty amounting to 200 million euros, and swapping debt to mitigate interest rate risk. This aid, which could reduce Greece’s debt by 20 percentage points against GDP through 2016, came with the demand that Greek Prime Minister Alexis Tsipras pursue “serious” fiscal reform. The European Union’s European Stability Mechanism put these short-term debt relief measures on hold after Tsipras announced he would spend more on pensions and sales tax relief. However, by December 24 the European Stability Mechanism gave the short-term debt relief approved the measures. The International Monetary fund continues to call for Greece to lower the income tax-free threshold. In Germany, Deutsche Bank agreed to pay USD 3.1 billion in fines and USD 4.1 billion for consumer assistance programs in settlement claims to the U.S. government for toxic mortgages sold by the bank from 2005 to 2007. The USD 7.2 billion settlement is much lower than the USD 14 billion demanded by the U.S.Justice Department. Swiss Bank Credit Suisse similarly reached a USD 5.3 billion settlement with the U.S. over mortgage-backed securities. Italian Bank Monte dei Paschi faces closure and required to 8.8 billion euros to survive in December. The Italian government, which already faces a 2.23 trillion euro debt second only to Greece, has already arranged a 20 billion euro fund to support struggling banks like Monte dei Paschi. According to the France’s Labor Ministry, jobless claims declined for a third month in November by 0.9 percent. This is the longest streak of jobless claim declines in France since 2008 and the economy shows signs of recovering as business confidence continues to rise as well according to economists.
SoftBank CEO Masayoshi Son pledged on December 6 to invest 5.9 trillion yen in new startups in the U.S. and create 50,000 new jobs. President-elect Trump has taken credit as a key player in ensuring Softbank’s plan to invest in U.S. businesses. Son’s plan is in line with Softbank’s October announcement to create a USD 100 billion fund with Saudi Arabia and other investors called the Softbank Vision Fund. Since the announcement, Softbank has developed plans to invest in U.S. business OneWeb. The yen has continued to decline since November and passed 115 to the dollar after the U.S. Federal Reserve raised interest rates in December. Asahi Glass Co. stated on December 20 that it would acquire CMC Biologics for 60 billion yen in a move to enter the drug manufacturing industry. Panasonic Corp. becomes a major stakeholder in pan-European technology company Zetes Industries SA for 149.6 million euros. Reports estimate that Toshiba Corp. lost as much as 500 billion yen on its U.S. nuclear operations. Looking to economic reform in 2017, former trade ministry official Jun Okumura does not expect any major changes to Japan's economic policy. Economists have pointed that Abe is waiting to see how the incoming Trump administration will affect U.S.-Japan relations and the economy. Chief economist at Credit Suisse Securities in Tokyo Hiromichi Shirakawa said, “Trade relationship between Japan and the U.S. could get significantly worse.”