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Another lively week in the world of global capital markets, particularly, and not entirely surprisingly in the US. Global bond markets took a tumble, the yield on the 10 year US treasury rose from 1.8% at the start of the week to close at 2.15% on Friday. According to Bloomberg markets, nearly a trillion of dollars were wiped of the value of US treasuries. Donald Trump with his promise of more liberal fiscal stimulus, regulatory repeals alongside an increase in infrastructure spend has seen the US yield curve steepen sharply, suggesting an improving economic outlook. As a reminder, a yield curve steepening is the term used to describe an increased gap in yields between the shorted data maturing bonds and those maturing in 10 years and above time. The inverse which is a narrowing of yields, or even an inverting, when longer dated yields are lower than shorter dated ones. This considered a possible indication of a looming recession. The S&P responded positively as it rose over 3% on the week.

As we pointed out this week this has led to a sharp change in sector leadership as fund managers are caught trapped in the “bond proxy sectors”, and underweight the value sectors. Copper had its best week for quite some time.  The FTSE 100 index was largely unmoved in the past week, however some of the moves within the index were dramatic.

The move in UK bond markets was far more muted, yields on the longer dated bonds did rise however the 10 year UK gilt closed the week yielding 1.32%, remaining well below that of its US equivalent. The big move was in sterling as the pound recovered some of its recent losses to the US dollar, despite the US dollar having a good week against other major currencies. Gold bugs had a bad end to the week. As the expectation of Donald Trump becoming president took hold, speculators ran for the haven of gold, taking the price up over $1330 an ounce. As the week progressed and yields rose, making gold a less attractive investment the price fell back to close the week at $1230 an ounce, a five-month low.

What will the week ahead bring, probably not as much excitement as the previous week? Fund managers who have been sitting on the side-lines will now be trying to decide how to plan for the end of the year. Do they start chasing the rapid recovery in the value names, or do they look to take advantage of the recent falls in some of the growth sectors. History tends to suggest once a long-term trend breaks, it does tend not revert any time soon. 

To the week ahead, as usual there is a smorgasbord of economic data from the US economy, including on Thursday the October inflation rate. With the move in the bond market of the past week and Mr Trump’s impact on growth expectations for the US. The question must turn from will the Fed move in December? To how much will they move by?  Could they now raise rates by 0.5% and not the 0.25% the market now anticipates?  For the UK economy, we get a snapshot of the economy with inflation on Tuesday, unemployment on Wednesday and finally the second estimate for third quarter GDP on Friday.

 

Posted on November 13, 2016 .