Developed equity markets saw gains last week as US treasury yields continued to rise. The curve in the yield gap between longer and shorted dated maturities further steepened as expectations that the new regime will introduce fiscal policies to relive the pressure on monetary ones. Capital markets are now fully expecting a rate rise in December from the Federal Reserve of 25 basis points. The debate is now moving towards what further moves the Federal Reserve will make next year. The S&P 500 closed the week within a hare’s breath of its all-time high. The FTSE 100 finished the week higher, however it continues to jockey around 6800.
The US dollar continues its rise against the basket of other currencies. The pound also continued to recover against the euro, having reached a low of almost 1.10 to the euro post Brexit, the pound is now trading above 1.16. Perhaps Mr Trump’s open support of Brexit will give the UK government a stronger hand at the negotiating table in the coming year.
The rising US dollar has been putting pressure on emerging market equities as the MSCI emerging market index fell over 4% in the past week. A stronger dollar and higher US treasury yields make investing in emerging markets less attractive. As many emerging markets borrow money in US dollars’ a rising dollar increases the debt burden. So far, the developed equity markets are not focusing in on this. Should the US dollar continue to climb it may well do.
Looking to the week ahead the Autumn statement on Wednesday will be the focus point for the UK economy. This will be Philip Hammond's first public utterance since taking office. Hopes are that he will loosen the fiscal belt and help further boost the UK economy. One can only assume he has seen the psychological benefit Trump’s comments have had on economic sentiment that he will be willing to follow suit.
The uncertainty lies as to how much the chancellor can manoeuvre within the public finances. There are differing opinions as to how much room he has got. The question a chancellor must face is how much to borrow and how much in turn will this will benefit the economy. The hope will be that greater spending leads to economic growth which in turn leads to greater tax revenues which in turn can be used to repay the debt. There are expectations that Mr Hammond will increase infrastructure spend and business investment. Post Mr Hammond's statement, on Thursday we get the second estimate for UK third quarter GDP.
Despite the Federal Reserve are now almost certain to move on December the 14th, the release of the minutes from the last meeting will gain some headlines on Wednesday.
Senior officials from OPEC meet this week in Vienna, oil prices faltered towards the end of the week ahead of the meeting. The oil price did spike earlier in the week on hopes the Saudi’s can seal a deal to reduce production.