By: Mark Nelson
02.12.2016
02.12.2016
We round up below our thoughts and reflections on the last month in the markets, looking at what we call the Trump Tantrum, record highs in US stocks, and an agreed cut in oil production – the first for eight years.
Trump Tantrum
WHAT IS IT? WHAT IS GOING ON HERE?
Government bonds, particularly those with longer-maturities, have sold-off since Donald Trump’s election on 8th November, sending yields sharply higher. The yield on the US 10-year treasury has risen by 55bps over the course of the month.
WHY IS IT IMPORTANT? WHAT DOES IT MEAN?
Yields on long-dated government bonds tend to be driven by inflation and growth expectations. Donald Trump has promised to increase fiscal spending, an inflationary policy and one that could potentially boost growth prospects in the US, at least in the short-term.
WHAT TO TAKE AWAY FROM IT? WHY SHOULD I CARE?
Higher yields on long-dated bonds not only increase the borrowing cost of governments but influence various other lending rates including those of corporates and households. It should be noted however that the rise, while sharp, is from historically low levels.
US Stocks Hit Record Highs
WHAT IS IT? WHAT IS GOING ON HERE?
A number of US equity indices reached all-time highs in November. Monday 21st was the first time since 1999 that the S&P 500, Dow Jones, Nasdaq and Russell 2000, all hit record highs on the same day.
WHY IS IT IMPORTANT? WHAT DOES IT MEAN?
Several of Trump’s campaign promises, including an expansionary fiscal policy and lower corporate tax rates, have supported US stock markets. Cyclical stocks have rallied on expectations of improving growth prospects. Shares in companies that benefit from steeper yield curves, in particular financials, have also performed strongly.
WHAT TO TAKE AWAY FROM IT? WHY SHOULD I CARE?
While some of Trump’s policy promises can be considered pro-growth, there are others, such as protectionist measures that could be damaging to economic prospects. It remains to be seen which campaign promises he is able to deliver upon.
Oil Production Cuts
WHAT IS IT? WHAT IS GOING ON HERE?
At a meeting on 30th November, OPEC, an organisation of oil producing nations, reached an agreement to cut oil production, the first such deal for eight years.
WHY IS IT IMPORTANT? WHAT DOES IT MEAN?
The deal came following prolonged negotiations. The result has been for the oil price to spike, with rent crude futures higher by 16.3% since the close on 29th November.
WHAT TO TAKE AWAY FROM IT? WHY SHOULD I CARE?
A higher oil price should increase the revenues of crude producing companies, but those that have oil as an input cost could potentially suffer. Gasoline and energy prices are also a component of inflation measures so a higher oil price should have an upward impact on inflation
