Weekly Economic Review Jan. 28, 2017
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“The recent run in equities was very hard and very fast in the U.S. – the earnings recession is behind us”
Maturity 1 mo 3 mo 6 mo 23-Jan-2017 0.27 0.35 0.48 27-Jan-2017 0.27 0.35 0.48
1 yr 0.69 0.69
2 yr 0.87 0.87
3 yr 1.03 1.03
5 yr 1.30 1.30
Stephen Wood Russell Investments Chief Strategist
10 yr 30 yr 1.77 2.50 1.77 2.50
Market Overview The stock market was in great spirits this week as the Dow Jones Industrial Average closed at 20,069pts on Wednesday, January 25, reaching the 20,000pts milestone for the first time in history. As the first week after Donald J. Trump’s inauguration, the market has also continued to respond positively, with the Dow up by over 1,700pts since the presidential election on November 9. The Dow closed at another record high of 20,100pts on Thursday and has only fallen slightly to close at 20,094pts for the week. The NASDAQ and S&P 500 indices have also followed the lead of the Dow and went from 5,547pts to 5,661pts and 2,267pts to 2,295pts, respectively. This represents a 7.2% rise in the S&P 500 index since the election, as the market continues to expect President Trump to make good on his campaign promises in promoting deregulation and large-scale infrastructure development plans. On the other side of the world, China and Hong Kong are celebrating the start of the Chinese New Year on Saturday, January 28. This past year of the monkey has seen the Hang Seng Index of Hong Kong rise by 21.1%, which is less than but about the same pace as most of the Western markets. For the last week, the HSI rose from 22,886pts to 23,383pts, representing a rise of 2.17%, reflecting a general positive outlook and festive atmosphere in the East Asian financial scene. On the other hand, European market performance is helped by the banks as the Stoxx Europe 600 Banks Index rose by 2.3% in the week.
Macroeconomic Overview This week saw many grappling with the new world reality with President Trump at the helm of the free world. Apart from the strong performance by major US indices, the market, and indeed the world, is also looking at multiple elections in the coming year to see whether the populist swing in 2016 will continue into 2017. Most notably, several core members of the European Union – France, Germany, the Netherlands, and smaller EU states including the Czech Republic and Slovenia will see general elections in 2017. If Eurosceptics are elected in these countries, there may be new volatility in the world market. Looking ahead to the domestic economic calendar this week, there are many important reports coming out, which could shed light on whether the growth in the equities market trickled down to the consumer level. On Tuesday, the Existing Home Sales report and the FHFA (Federal Housing Finance Agency) House Price Index on Wednesday should show if the housing market is catching up. The world will also be looking for the performance of the macro economy in the GDP report on Friday while the Consumer Sentiment report and the Jobless Claims should tell the improvements in the daily life of ordinary Americans in the last days under President Obama. At the end of this week, British Prime Minister Theresa May visited the White House to meet with President Trump. There are speculations that the Prime Minister is trying to lay the groundwork for a free-trade agreement with the US swiftly after Brexit is triggered and hopes to show a strong stance of independence when negotiating with the EU. The world will continue to follow closely the performance of both the sterling and the FTSE 100 index in the coming days as the consequences of this meeting slowly influences the markets. There is also worry about a looming trade war between the US and Mexico as both presidents continue a very public war of words over the border war Trump promised to build in an executive action. However, major banks including Citigroup, Santander and BBVA have reportedly opted to remain in Mexico under the assumption a weak peso helping Mexico’s competitiveness globally.
Fixed Income Overview As the equities market performed very well in the earlier part of the week, with the Dow seeing record heights over 20,000pts, the treasury bond yields rose with it. The 10-year yield went from 2.3971% to 2.5116% on Wednesday but have since fallen back to close 2.4843%. Treasury bond yields have continued to go up since July 2016, the current rate is also close to the peak of 2.5916% in December, showing a lingering expectation of positive prospects under the plans of President Trump. Again as Chinese New Year arrives, the Brent crude oil has also taken a hit as a result. Trading has been thin and the price of crude oil fell from $56.20 to close at $55.52 for the week. The market also remains cautious as the US rig count data will be coming out soon. It should be a good indicator of recent oil activity in the US as shale activity has been increasing and President Trump appears to favour fossil fuel deregulation over President Obama, giving hope to the energy sector. Gold price has started to fall after a long period of rise since December 2016, closing at $1190.60 on the week. The initial fall was due to the strong performance of the stocks and the dollar after the Trump victory, but a report from UBS has since shown investors being more cautious with the performance of the equities, which may see the gold price rebound. However, same as oil, the markets have seen decreased demand this week as Chinese New Year arrives.
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Industry Focus: Oil & Energy A brief look at 2014 to 2016 shows that the extended low global oil prices did not have their intended effect of kicking US shale producers out of the market. Prices have been ranging between $40 - $50/barrel for months until OPEC announced their output cut agreement. Experts predict that the global supply and demand of oil will return to a sustained equilibrium slowly even as US shale producers resume more active drilling. US oil companies have learned to survive in a low oil price environment for years. They are expected to show moderate growth throughout 2017 as prices slowly recover. But a rally too extreme may bring prices down to the original $40 - $50/barrel range. Skeptics continue to worry as massive oil and refined product inventories have been ramping up since the oil glut. Following OPEC’s notorious tradition of its own members not keeping its own promises, Iran may produce more barrels than what was agreed to during the oil cut agreements late last year. This creates a domino effect where all the other nations start to overproduce as well, making the output cut agreement useless which ultimately lowers the global price of oil. From a long term view, climate change and the rise of electric vehicles/ride-sharing make future estimates of perpetual growth less likely than they did historically. Oil experts predict demand will peak within 20 years.
Transaction Highlights Sprint acquires a one-third stake in Tidal In 2015, legendary hip-hop artist/mogul Shawn Carter (better known as Jay Z) bought Tidal, a small streaming service, for $56 million. His initial plan was to attract customers by providing exclusive content from celebrities. But as losses mounted, popular media constantly criticized its early stumbles. This past Monday, Sprint announced that it would buy a one-third stake in the music streaming company for an undisclosed amount. Tidal plans to utilize Sprint’s huge customer base as it has historically struggled against streaming giants like Spotify and Apple Music. Spotify currently has more than 40 million paying subscribers while Apple Music has roughly 20 million themselves. Tidal reported that it had 3 million paying subscribers but it’s under scrutiny as reports of heavy inflation have been released. Johnson & Johnson acquires Actelion for $30 billion Johnson & Johnson plans to strengthen their rare disease treatment arsenal by buying Swiss biotechnology firm Actelion for $30 billion. The US giant paid $280/share in cash in this deal. The world’s largest healthcare company was specifically after Actelion’s solutions to pulmonary arterial hypertension, commonly referred to as high blood pressure in the lungs. While the acquisition is still under regulatory approval, the deal was agreed upon unanimously by both boards. Actelion will have a new spinoff company where they will specialize in drug discovery and early-stage clinical developments in Switzerland. Johnson & Johnson will have a 16% stake in the spinoff company.
Data & Indicators Current Week
Upcoming Week Date 24-Jan 25-Jan 25-Jan 25-Jan 26-Jan 26-Jan 26-Jan 26-Jan 26-Jan 26-Jan 27-Jan 27-Jan 27-Jan 27-Jan 27-Jan
Time (ET) Statistic 10:00 AM Existing Home Sales 7:00 AM MBA Mortgage Applications Index 9:00 AM FHFA Housing Price Index 10:30 AM Crude Inventories 8:30 AM Adv. International Trade in Goods 8:30 AM Initial Claims 8:30 AM Continuing Claims 10:00 AM Leading Indicators 10:00 AM New Home Sales 10:30 AM Natural Gas Inventories 8:30 AM GDP Deflator 8:30 AM GDP-Adv. 8:30 AM Durable Orders 8:30 AM Durable Goods -ex transportation 10:00 AM Michigan Sentiment - Final
For Dec 21-Jan Nov 21-Jan Dec 21-Jan 14-Jan Dec Dec 21-Jan Q4 Q4 Dec Dec Jan
Actual Briefing Forecast Market Expects 5.49M 5.58M 5.55M 4.00% NA NA 0.50% NA NA +2.840M NA NA -$65.0B -$65.1B -$65.0B 259K 242K 246K 2100K NA NA 0.50% 0.40% 0.50% 536K 600K 589K -119 bcf NA NA 2.10% 2.10% 2.10% 1.90% 2.50% 2.20% -0.40% 4.00% 3.00% 0.50% 0.60% 0.50% 9850.00% 9790.00% 9800.00%
Prior Revised From 5.65M 5.61M 0.80% 0.30% 0.40% +2.300M -$65.3B -237K 234K 2059K 2046K 0.10% 0.00% 598K 592K -243 bcf 1.40% 3.50% -4.80% -4.60% 1.00% 0.50% 9810.00% --