Market Commentary, Week Ending in 3/28/2017

BY STEPHANIE ROATIS & ADAM CLARK

 

SUMMARY

Following the House Republican decision on Friday to pull the American Health Care Act, investors were left feeling uneasy over the future of other promised pieces of legislation. This uncertainty has increased volatility among US equities, and led to global markets giving back some of the post-election gains.

 

MARKETS (as of 8:30 AM on 03/27/17; change since 03/24/17)

Equities

  • S&P 500: 2,343.98 (-0.08%)
  • Nikkei 225: 18,985 (-1.44%)
  • FTSE 100: 7,273.93 (-0.86%)

Interest Rates

  • UST-10 Yr.: 2.36% (-4bps)
  • JPY-10 Yr: 0.057% (-.9bps)
  • GDBR-10 Yr: 0.389% (-1.4bps)

Commodities

  • Gold (spot): 1,257.80 (+0.76%)
  • Oil (Brent): 47.49 (-1.00%)
  • Copper: 2.5815 (-1.88%)

Currencies (app.: +, dep.: -)

  • € (EUR/USD): 1.0888 (+0.852%)
  • ¥ (USD/JPY): 110.1500 (-1.033%)
  • £ (USD/GBP) 1.2591 (+0.0121%)

ECONOMIC HIGHLIGHTS

Ukraine Sanctions on Russian Banks

Ukraine’s president Petro Poroshenko approved the National Security & Defense Council’s proposal to impose sanctions against the subsidiaries of five Russian banks over one year (Sberbank, VTB, BM-Bank, Prominvestbank, VS Bank). It was done as a response to protests by nationalist radicals in front of Russian-owned banks throughout Europe. This could not only directly harm Ukraine’s economy, but could cause a domino effect, as the five banks are some of the healthiest and most efficient in the banking system of Ukraine. It’s effectively cutting off its own water supply.

The Durable Goods Report

Total durable goods orders grew 1.7% month-on-month to reach $235.4bn (consensus: 1.1%), according to the Department of Commerce. This was due largely in part to the 46.7% increase in commercial aircraft orders during the month of February. Because the US Report is a component to the Conference Board’s US Leading Index, we can speculate that a sound US economy in uncertain times should settle fears in other developing areas.

POLICY AND POLITICS

Federal Rate Hikes

There was a recent rate hike in which the Fed brought rates from 0.75 to 1.0.  This is pretty significant to monetary policy, although it was projected by most people and yields have unexpectedly dropped following the Fed’s move. Some argue, that due to the quantitative easing moves following the recession, raising rates in the overnight repo market may no longer be an effective way of slowing inflation.

The Alternative Right of France, Holland, and Germany

We have been hearing quite a bit about the French election, and rightfully so, but it is worth noting that the rise in nationalism is not solely happening in Britain and France.  A lot of people have drawn parallels to our election to show that these parties in Europe may have a chance.  Germany is likely to have some alternative right members in Parliament after their election. Holland’s Party for Freedom made gains but did not get the majority, but if France is to elect Le Pen we can reasonably expect the EU to die.  Not only has she promised the exit, but it can be expected that as other countries see strong rises in nationalism EU sentiment as a whole may fall.

Treasury Secretary Mnuchin

The former Hollywood financier was interviewed Axios (a news website) and revealed that he will lead the push for “comprehensive” tax reform by this August, prior to the congressional recess. US markets have given up some of the post-Trump gains over the past two weeks largely over fears that the president may not be bring tax reform to the congressional floor as fast as he had originally said. Mnuchin went even farther saying that Trump’s policies he has scheduled to bring forward will produce growth that markets have not realized yet.

INVESTMENT IDEA

Because of the rising anxiety in the market (a higher VIX as well as the fact that Trump’s first failure is scaring the shit out of the Street) we may want to go into the gold market.  Gold is a traditional investment in times of crisis, and the market seems to be unsettled in its current state.  With this being said, this is a position that would have to be exited if there was any sign of tranquility, as the prices tend to dip again when the market stabilizes. Also, the lower dollar is usually correlated to higher gold prices.

WHAT TO WATCH

In the coming days, Trump is predicted to sign an executive order aimed at undoing Obama’s Clean Power Plan, which will end a moratorium on federal-land coal mining. Lifting the restrictions would reduce energy costs and revitalize the coal industry and it’s economically ravaged communities (think: McDowell County in WV). Globally, this would prevent the U.S. from meeting its commitments under the Paris Climate Agreement and would strain relations on this still-extremely-young negotiation.