Weekly Markets Commentary — January 17, 2017
David Joy – Chief Market Strategist, Ameriprise Financial
What Could Inauguration Day Mean for Markets?
After a couple of weeks in which economic fundamentals were the focus, politics once again intrudes this week. On Tuesday, UK Prime Minister Theresa May is expected to outline her plan for Brexit. She has maintained that Article 50 of the Lisbon Treaty would be invoked by the end of this year’s first quarter. This starts the clock ticking on Brexit. This weekend, a report in the Sunday Times of London indicated that Ms. May intends to call for a “hard” Brexit. In short, a clean break from the EU, necessitated by the desire of the UK to control its own borders and not be subject to EU rules on immigration and the European Court of Justice.
There has been some hope that a separation could be negotiated that would allow the UK to remain in the EU single market and customs union, but the immigration issue has proven to be a non-starter. Instead, Ms. May is expected to outline a future for the UK that is independent of the EU, and leaves it free to negotiate trade deals with other nations and economic blocs on its own, including the EU. The pound has been under pressure since the Brexit vote in June, when it was trading at 1.48 versus the dollar. In the aftermath of that vote, the pound immediately plunged to about 1.33 and maintained that level through the end of September.
In October Ms. May floated the March, 2017 deadline for invoking Article 50, sending the pound sharply lower once again, this time to 1.18, its weakest level since 1985. The scheduling of today’s speech and the reports of its content have once again caused the currency to fluctuate with uncertainty, not to mention the president-elect commenting on the dollar in the Wall Street Journal. The good news in all of this for investors, at least for those with pound exposure, has been the stock market’s performance, as the weaker currency has made exports cheaper. The FTSE 250 index is higher by 22 percent since the Brexit vote in British pound terms, but 14 percent in dollars.
Uncertainty surrounding the future of Europe, and its relationship with the U.S., only intensified following comments by Donald Trump. In addition to remarking upon the relative value of the dollar, a subject generally viewed as best left to the Treasury secretary, the president-elect openly speculated about the future of the EU, wondering which country might be the next to leave. He also said that the NATO treaty was obsolete, and that he was unsure how he might get along with German Chancellor Angela Merkel.
Will the ‘Trump Bump’ Last?
In just three short days the presidential inauguration will take place, and Mr. Trump will no longer be speaking as a private citizen. By his own admission, nothing of importance will take place on Friday as invited guests enjoy the festivities. But as early as next Monday the new administration will get to work, and with it comes the possibility of an increase in market volatility as what were heretofore opinions will now carry the weight of policy prescriptions. And what started out as the “Trump bump,” which pushed stocks higher in the five weeks following the election, but has since turned into the Trump interregnum, will be tested to see if it has endurance.
Investors Keeping an Eye on Earnings
Although the economic calendar is fairly light this week, earnings season accelerates. Last week the first round of bank earnings were viewed favorably and it continues this week with Morgan Stanley, Citigroup, Goldman Sachs and US Bancorp scheduled to report. Other bellwethers on the calendar include American Express, United Health, Netflix, IBM and General Electric. December consumer prices are scheduled for release on Wednesday.
According to Bloomberg the headline rate is expected to rise to 2.1 percent year-over-year, which would be its highest since June, 2014. The core rate is also expected to rise by 2.1 percent, matching its November increase, but remaining below its recent high of 2.3 percent reached last August. Also on the calendar are industrial production and housing starts. This week the European central bank meets, and japan reports on industrial production. Lastly, a steady stream of opinion and commentary will be forthcoming from the World Economic Forum in Davos.