How Windy Is It . . . ? Monday, 27th February 2017 – No.218
It was a quiet start to the week with the US holiday on Monday. This pause for breath is understandable as developed equity markets have now spent eight years moving in an upward trajectory without a correction of more than 20%. This is unprecedented and against a backdrop of all-time index highs and combined with the increased merger and acquisition activity, investors not surprisingly took profits.
While fundamentals remain intact, there is still a great deal of uncertainty surrounding politics which may, or may not, create catalysts for movement in bond and equity markets. Top of the political headlines last week was France, with reports suggesting an increasing momentum for Marine Le Pen. However, the withdrawal of Francois Bayrou and his subsequent endorsement of Emmanuel Macron do suggest that the hype surrounding Le Pen is somewhat exaggerated. Polls suggest that the second round result in the French elections will come out in favour of Macron with polls indicating that he could secure as much as 60% of the vote. Should these be believed? We all know how accurate opinion polls were last year!
Adding to the political woes was the publication of the minutes of the Federal Reserve’s Open Market Committee; this was key to understanding whether there would be a rate rise in the US in March. The two phrases that are key in the minutes were:
“…it may be appropriate to raise the federal funds rate again fairly soon…”
“…potentially at an upcoming meeting…”
This is the clearest indication that a March interest rate is on the table, but the markets have not currently priced this in. The Fed is generally not a fan of surprising the markets and with survey data indicating a 25% probability from market respondents, we think an interest rate rise next month is less likely. It is more likely that the Fed will look to raise rates in May or June, giving them breathing space to see what is in store in Trump’s budget.
Over the weekend, Treasury Secretary Steven Mnuchin speaking on Fox News TV said that the much anticipated Trump speech to Congress this week would be used to preview the upcoming budget announcements. It is fully expected that Trump will allude to sweeping tax cuts and a simplification of the US tax system. Mnuchin also hinted that Social Security and Medicare would suffer cuts.
So a quieter week than we have seen for a while and sets the tone for key rhetoric from both politicians and policymakers this week.