April 2017 | www.selectasset.com
April 2017 Market Update
On March 15, the Federal Reserve raised interest rates a quarter of a point. Several economists forecast that the rates will be hiked two more times this year. With growth at around 1%, many economists view that U.S. economic growth was still “quite low,” though based on past performance, growth has the potential to accelerate in the second quarter. Additionally, many economists see the political uncertainty to contributing to volatility to stock market and value of the dollar. Following the failure of the American Health Care Act, the dollar slumped nearly 2% in the latter half of March. Amid growing concern among investors that tax cuts, spending bills, and Obamacare repeal would not materialize, the U.S. stock market experienced the biggest drop since the November elections. Healthcare reform is a vital component to proposed plans for future tax cuts and spending bills. Nonetheless, despite the continued tension between Congress and the White House, U.S. Treasury Secretary Steven Mnuchin announced in late March that the White House will pursue tax reform that includes corporate and individual tax cuts. Along with tax cuts, discussions about a border adjustment tax have floated around Washington as well. The border adjustment would tax imports of U.S. companies while it would exempt exports. The U.S. Federal Open Market Committee released a statement in March, inflation is closer to the Committee's 2% objective. Overall unemployment rate hovered at 4.7% in February. However, according to reports, the unemployment rate for African-Americans reached 8.1 percent and 5.6% for Hispanics. In a speech to the National Community Reinvestment Coalition on March 28, Federal Reserve Chair Janet Yellen stated that “pockets of persistently high unemployment, as well as other challenges, remain” despite the general recovery of the economy. According to data from a Labor Department report, jobless claims rose to 234,000 in the week of March 4th. This is 20,000 more claims since the last report and is consistent with the opinion of many economists that the labor market is tightening.
Scottish Parliament voted 69 to 59 on March 28 to pursue a second independence referendum. This vote comes amid the official start of Brexit. Prime Minister Theresa May has tried to gain nationwide support for Brexit and rejected the idea of another Scottish referendum.On March 29, May submitted to European Union President Donald Tusk a letter to formally trigger Brexit and begin two years of negotiations. The European parliament drafted a resolution to limit the post-Brexit transition to three years. Potential points of conflict during the transition will be money. Currently, the EU is pushing for the UK to pay roughly 60 billion euros. May has stated that U.K. will need to pay past financial commitments but also indicated U.K. may also have monetary claims to the EU as well. With Brexit becoming a reality, the Financial Policy Committee predicts as a possible scenario post-Brexit that the UK’s GDP will slump 4.7%. The committee also forecasts there could potentially be a 33% drop in house prices and commercial real-estate value could slip 40%. Household debt, China’s economy, and Brexit are among the main risks to UK’s financial stability according to the Bank of England. Among agreements, May said she would like to resolve early include the residency of EU and British citizens since the main goal for Brexit is to gain control of labor flows. According to the Financial Times, May will not immediately end EU citizens rights the UK. Goldman Sachs Group Inc. and Morgan Stanley executives have announced they are preparing to move operations from London to other locations in the EU in response in response to the triggering of Brexit. Co-head of investment banking at Goldman Sachs Richard Gnodde stated that his plan plans to relocate hundred of London-based employees and hire people in the EU to expand other offices.
For the first time in a year, inflation in Spain dropped from 3% to 2.1% in March. Inflation rates in Germany fell as well, going from 2.2% to 1.9% this past month according to a Bloomberg survey. However specific regions in Germany experienced inflation differently. In Saxony, inflation dropped from 2.4% to 1.8%. A separate survey from Bloomberg revealed that inflation overall in the eurozone was 1.8% in March. This is down from 2% as documented in February. For the past fifteen quarters, the eurozone has experienced economic growth along with inflation reaching 2%. However, despite these signs, many economics and officials still view recover as ongoing. Energy drives growth in consumer prices considerably, and industrial production data indicate growth is unstable. With the European Central Bank’s Targeted Longer-Term Refinancing Operations coming to a close soon, euro-area lenders rushed to partake in these free long-term loans. Estimates place the total amount taken by euro-area lenders at 233.5 billion euros. The euro traded $1.9728 on March 16, the highest value since February, after the Liberal victory in the Dutch election over the anti-Islam Freedom Party. The threat of the Freedom Party exemplifies the ongoing populist, nationalist movement surging through Europe. Economists and government officials continue to have their eyes on the French presidential election next month. Presidential candidate Marine Le Pen has expressed plans to withdraw France from the European Union. Naoto Ono of Ueda Harlow has stated that “the impact on the French election should also be monitored; it’s dangerous to become too optimistic about the European situation.” Following the Dutch election, French and Italian bonds increased in value. Economists view this as a response to a positive sign that populism in the euro region can be stopped. For the fourth day in a row, French bonds gained and 10-year yields dropped to below 1%.
At the CeBit technology show held in Hanover, Germany on March 19, German Chancellor Angela Merkel and Japanese Prime Minister Shinzo Abe asserted that global markets “can be open and fair” and pushed for efforts to maintain free trade by advocating for a trade accord between Japan and the European Union. While extolling the benefits of free trade and investment, Abe stated that Japan “wants to be the champion of upholding open systems alongside Germany.” These comments were in response to the ongoing discussion of an EU-Japan accord since 2013. This accord could potentially lower barriers to trade and investment for both EU and Japan. EU data shows that Japan is the EU’s second-biggest Asian trading partner and accounts for more than a third of global economic output along with EU. While the U.S. Federal Reserve raised its key interest rate in March, the Bank of Japan left its monetary easing program unchanged, stating that it would keep two key interest rates untouched and continue its pace of asset purchases. Economists had largely predicted this outcome, and many view the Fed rate increase is not helpful to the BOJ as it could potentially force the BOJ to increase bond purchases or raise its target for yields. However, since inflation rates are still far below the BOJ’s target 2%, Governor of BOJ Haruhiko Kuroda and Deputy Governor Hiroshi Nakaso stated last month that changing interest rates would be too soon. Their statement harkens back to a premature tightening in 2000 and 2006. Despite flagging inflation rates, the BOJ reaffirmed that Japan’s economy is moderately recovering with corporate profits and business investing improving. Despite signs of modest economic recovery, however, reports show that exports are largely sustaining growth while domestic demand still struggles to increase. Revised reports of the GDP in the last three months of 2016 reveal that Japan experienced the fifth-straight period of growth. This is the longest growth streak since 2006.