Investment Week in Review - 16 January 2017

By Marcus Damen - January 16, 2017

Looking at the issues impacting investment markets over the last week

News in Review

Australia

  • Retail sales growth, the primary gauge of consumer spending in Australia, rose 0.2% in November 2016, which was half of what the market had expected.

US

  • Donald Trump’s first press conference as President Elect focussed primarily on how he would avoid conflict of interest between his business empire and the Presidency and his relationship with Russia. The lack of detail on economic policies led to some weakness in share markets.  
  • Higher energy prices saw headline import prices rise 0.4% month on month in December to be up an annual 1.8%, which is the most since March 2012.
  • A report from the National Federation of Independent Business showed that optimism among America’s small businesses rallied in December to its highest level since 2004 and the largest monthly increase since 1980, a clear demonstration of the level of optimism generated by the election of Donald Trump from business.

Europe & the UK

Investor sentiment in the euro zone improved in January to its highest level since August last year courtesy of expectations that Republican Donald Trump's presidency will boost an economic pick-up in the region.

China

  • Updated inflation figures for December 2016 revealed producer price inflation surged to a more than five-year high while consumer price inflation moderated.  Economists have dubbed the recent strength in the PPI as ‘goldilocks’ type scenario, whereby inflation growth is trending more evenly between consumers and producers. 
  • China's December trade surplus came in at $41 billion exports fell by a more-than-expected 6.1% from a year earlier, while imports beat forecasts slightly, growing 3.1% on strong demand for commodities.

Comment

With Donald Trump’s inauguration this weekend (our time), we will soon get see to whether he does indeed ‘Make America Great Again’.   The last President to use this slogan as well as trying aggressive tax cuts and fiscal stimulus was Ronald Reagan, who many credit with reviving the US economy in the 1980s after the stagflation years of the 1970s.  While the same strategies could possibly work again, it seems that current debt and deficit levels, as well as interest rate levels, make now a much more challenging scenario than the one faced by Reagan.  

For instance, when Reagan took office in 1981, the US government had approximately $1 trillion of debt, representing approximately 30% of the country’s annual gross domestic product (GDP) at the time.  As debt has risen at a faster rate than economic growth since (partly due to Reagan’s policies), the debt level is now approximately $20 trillion and exceeds 100% of GDP.  Combine this with a deficit that is already on the rise due to the costs of managing an ageing population and it becomes clear that it will be much more challenging for Trump to go on a spending spree than it was for Reagan.   

Further, Reagan was assisted greatly by the Federal Reserve who, during his presidency, lowered interest rates from around 19% to around 9% which is a massive amount of monetary stimulus.  Trump, however, will face a Federal Reserve that has broadly exhausted its conventional policy options and can really only move rates significantly in one direction (the opposite one than during the Reagan era).   

It could therefore be quite ineffective and/or dangerous if Trump were to simply copy and repeat the policies utilised by Reagan and we will be watching debt levels and associated risks with great interest.   

The Week Ahead

  • US: Consumer Price Index (YoY) (DEC)
  • Australia: Westpac Consumer Confidence (JAN), Unemployment Rate (DEC)
  • China:  Gross Domestic Product (YoY) (4Q), Retail Sales (YoY) (DEC)
  • Europe: European Central Bank Rate Decision (JAN 19), Euro-Zone Consumer Price Index (YoY) (DEC)
  • UK: Consumer Price Index (YoY) (DEC)

Company News

  • Shares in US car manufacturing giant Fiat-Chrysler declined 8.5% after the EPA questioned software used in some of the company’s diesel vehicles that might impact compliance with emissions regulations.
  • Bellamy’s fired its chief executive Laura McBain and slashed its sales outlook, moves which sent the infant formula maker’s shares tumbling.  The company entered into a trading halt in mid-December when its shares slumped almost 45% in 10 days after it warned of regulatory risks in China, its largest growth market.
  • Shares in Nickel miner Western Areas slumped almost 20% following the Indonesia government announcing that it will lift its ban on unprocessed ore exports that was imposed in 2014.

Markets in Review

 

Capital Return

   
 

Weekly

CYTD

FYTD

S&P ASX 200

-0.6%

1.0%

9.3%

DOW JONES

-0.4%

0.6%

10.9%

S&P 500

-0.1%

1.6%

8.4%

UK FTSE100

1.8%

2.7%

12.8%

FRENCH CAC40

0.3%

1.2%

16.2%

GERMAN DAX

0.3%

1.3%

20.1%

JAPANESE NIKKEI

-0.9%

0.9%

23.8%

SHANGHAI COMPOSITE INDEX

-1.3%

0.3%

6.3%

ASX200 Sector Performance  

ASX200 Biggest Movers 

$1 Australian buys you:

Security

LastPrice

AUDUSD

0.7480

AUDGBP

0.6150

AUDCNY

5.1597

AUDJPY

86.0620

AUDEUR

0.7048

AUDNZD

1.0529


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