The Trump effect continued to reverberate in the financial markets in the United States. Most notably, both US yields and the US dollar recorded significant upticks. Steeper yields are primarily attributable to the expected fiscal stimulus and infrastructure spending promised by the President-elect, while these higher yields are helping the US currency gain further traction.
In the United States, housing and labour market numbers continued to improve and retail figures beat expectations.
Ben Steinebach Head of Investment Strategy
In fact, yesterday both received further encouragement from comments by the ECB and the US Federal Reserve. It is becoming very likely that the two central banks will be moving in opposite directions from next month: investors are factoring in an extension of the ECB’s QE programme as well as a 25 basis-point hike in American key policy rates. We see both trends persisting for some time and European and US yields diverging even further, probably resulting in a further US dollar uptrend. One benefit of all this is that American equity markets also stand to gain, bringing equity investors both currency and price gains.
European equity markets languish
While markets in Europe managed to ride the Trump wave last week, the effect petered out quickly in the week that was. Contrary to the continued upward trajectory in the United States, stock markets in Europe are stuck in a sideways drift. Yields also stabilised somewhat, although peripheral yields mostly continue to rise. In other words, Europe’s north and south are moving even further apart. Meanwhile, the euro had a pretty bad week and not just because of the expected divergence in central bank policies: imminent geopolitical issues in Europe also came into play. In early December, all eyes will be on Italy and its referendum, while 2017 will see elections in France, the Netherlands and Germany among other countries. The meteoric rise and success of populist leaders in both the United States and the United Kingdom might well presage an increased risk of further divisions in Europe.
Mixed macroeconomic and corporate figures
In the United States, housing and labour market numbers continued to improve and retail figures beat expectations, while industrial output disappointed and inflation was more or less unchanged. Meanwhile eurozone industrial output and economic growth hardly budged, whereas inflation and sentiment in Europe improved a little on balance. The Netherlands stood out for its fine figures, with the country reporting growth for the tenth consecutive quarter. Excelling across the board, the Dutch economy is now outperforming those of its neighbours.
Asia recorded slightly disappointing Chinese industrial production and retail sales, but industrial companies in Japan again came in ahead of expectations. The week also saw a few stragglers reporting their quarterly results: NN Group’s met expectations, with investors mostly focusing on its proposed takeover of Delta Lloyd. NN Group is keen, but Delta Lloyd is holding out for more cash. Ahold-Delhaize shares lost ground in the wake of disappointing figures from the United States, where competition is hotting up. Among American players, Cisco saw its share price drop on disappointing results and the news that corporations are expected to spend less on technology going forward. Wal-Mart’s share price also retreated as sales lagged expectations, even if income was better than had been forecast.
Focus on Trump and macroeconomics
The markets will of course pay a great deal of attention to key Trump appointments in the week ahead, while the macroeconomic focus in Europe will be on Markit PMI data and Germany’s economic growth and IFO figures. The United States will report Markit PMI data and durable goods orders, while the FOMC is scheduled to meet on Wednesday. A range of figures for Japan in the week should reveal a clearer picture of the state of play.Michael Nabarro Standing in for Ben Steinebach Head of Investment Strategy ABN AMRO